---
title: "Why did mortgage rates in the U.S. rise instead of falling despite the Federal Reserve's significant interest rate cuts?"
type: "News"
locale: "en"
url: "https://longbridge.com/en/news/218427422.md"
description: "After the Federal Reserve cut interest rates by 50 basis points, U.S. mortgage loan rates unexpectedly rose, surprising the market. Analysis points out two main reasons: first, the implied volatility of U.S. Treasury options surged, leading investors to demand higher yields to compensate for prepayment risk; second, the option-adjusted spread (OAS) of mortgage-backed securities (MBS) increased, reflecting investors' additional yield requirements for MBS risk"
datetime: "2024-10-31T06:04:52.000Z"
locales:
  - [zh-CN](https://longbridge.com/zh-CN/news/218427422.md)
  - [en](https://longbridge.com/en/news/218427422.md)
  - [zh-HK](https://longbridge.com/zh-HK/news/218427422.md)
---

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# Why did mortgage rates in the U.S. rise instead of falling despite the Federal Reserve's significant interest rate cuts?

Since the Federal Reserve announced a 50 basis point interest rate cut on September 18, U.S. mortgage loan rates have "risen instead of falling," which has surprised many market participants.

From September 17 to now, the yield on 30-year mortgage-backed securities (MBS) has surged by 84 to 96 basis points, while mortgage loan rates have increased by 72 to 89 basis points. Meanwhile, the yield on medium- to long-term government bonds has only risen by 53 to 67 basis points.

Real estate economist Tom Lawler believes there are two main reasons why the increases in MBS and mortgage loan rates have outpaced government bond yields.

First, **the implied volatility of U.S. Treasury options has skyrocketed**. Following the Federal Reserve's interest rate decision, a series of unexpectedly strong economic data and slightly higher inflation data caught market participants "off guard." For example, the BofAML MOVE index, which tracks the implied volatility of one-month U.S. Treasury options, rose from 101.58 on September 17 to 130.92 on October 28, reaching its highest level since October 30, 2023.

**Analysis indicates that increased implied volatility means greater uncertainty in the market regarding future interest rate changes. When interest rate volatility rises, borrowers are more likely to choose to refinance early (possibly to take out new loans at lower rates when rates decline). This risk leads investors to raise the risk premium when pricing loans to compensate for potential losses due to early repayment by borrowers.**

Second, **this involves the option-adjusted spreads (OAS) of mortgage-backed securities (MBS).** OAS refers to the difference between the yield on MBS and the yield on risk-free government bonds, adjusted to account for behaviors such as early repayment, reflecting the additional return that investors require to compensate for the risks associated with MBS.

Before the Federal Reserve's significant interest rate cut, OAS was at a relatively low level, which is typically considered the normal range without Federal Reserve intervention. **However, after the Federal Reserve cut rates, the market's higher expectations for interest rate volatility and the increased risk of early repayment by borrowers have led to a rise in OAS, requiring investors to seek higher yields to compensate for potential losses.**

Notably, Lawler stated that **the 30-year mortgage loan rate may be reassessed.** This takes into account the normal yield curve and the typical spread from the 10-year Treasury yield to the 30-year mortgage loan rate, as well as his assessment that the best expectation for the neutral real interest rate in the U.S. should be between 1.75% and 2%. He also added:

> "Of course, inflation/inflation expectations need to be added to this range. When the Federal Reserve achieves its 2% inflation target, the neutral rate will be between 3.75% and 4%." Lawler also believes that in the absence of an economic recession or crisis, **a 30-year mortgage rate of 6% to 7% may become the new normal.**

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