US 30-year mortgage rate vs 10-year Treasury: the spread that explains your APR

US 30-year fixed mortgage rates aren’t set by the Federal Reserve directly. They’re set by the bond market — specifically the secondary market for mortgage-backed securities, which prices off the 10-year Treasury yield with a spread for credit risk, prepayment optionality, and servicing margin. Understanding this spread is the difference between treating mortgage rates as political news vs treating them as predictable bond-market output.

The long-run pattern

Freddie Mac’s Primary Mortgage Market Survey has tracked the average US 30-year fixed-rate mortgage since 1971. Treasury yields come from the US Treasury daily publishing of constant-maturity rates. Computing the spread (mortgage rate minus 10-year Treasury):

Long-run average: ~1.7 percentage points. 2022-2023 saw the spread widen to ~2.5-2.9 pp — well outside the normal range. Mid-2024 brought it back toward normal but not all the way.

What drives the spread

The spread compensates the bond market for four things:

1. Prepayment optionality. Borrowers can refinance when rates drop. The MBS holder loses the high-coupon bond and is repaid early into a lower-rate environment — a negative convexity property that bond buyers demand compensation for.
2. Credit risk. Some borrowers default. Even with mortgage insurance and government backing (Fannie/Freddie), the residual credit risk needs pricing.
3. Servicing and origination margin.Originators (banks) keep ~25-75 basis points; servicers (the entity collecting your monthly payment) take ~25 bps annually.
4. Market technicals. When the Fed buys MBS (QE), spreads compress. When the Fed lets MBS run off (QT), spreads widen. The 2022-2023 widening is attributed largely to Fed QT.

What this means for a borrower

Today vs the long average

If the 10-year Treasury is at 4.2% and the historical average spread is 1.7 pp, a “normal” mortgage rate would be 5.9%. As of 2024, mortgage rates are 6.5-7%, implying a spread of ~2.5 pp — about 0.8 pp above normal.

Translation: even if 10-year yields stay flat, mortgage rates have ~0.5-0.75% of room to drop if the spread normalises. That’s the technical case for waiting on a refinance — though guessing the timing is a separate bet.

The Fed connection (real but indirect)

Federal Reserve rate decisions affect mortgage rates, but the link is indirect. The Fed sets the federal funds rate (overnight). This propagates through the yield curve to 2-year, 5-year, 10-year Treasury yields. Mortgage rates track the 10-year, not the fed funds rate directly.

Implication: a Fed rate cut announcement doesn’t immediately reduce mortgage rates. The bond market has usually already priced in the expected path of cuts; mortgage rates move on the surprise component, not the nominal decision.

Compute your own break-even

Use our mortgage calculatorwith the live 30-year rate (whatever you’re quoted) and a 5-year-out estimate (today’s 10-year Treasury + 1.7 pp historical spread). The difference is the “refinance optionality” baked into your current rate. If you’re paying for it (and you are), use it — refinancing is the realisation of that option.

The 2022-2023 spread widening, decomposed

Fed analysts and academic researchers have attributed the 2022-2023 spread widening (~1 pp above normal) roughly as:

• ~40 bp from interest-rate volatility (negative convexity premium).
• ~30-40 bp from Fed QT (reduced MBS demand).
• ~15-20 bp from bank balance-sheet stress (SVB era, March 2023).
• Rest: origination-channel friction, credit-quality concerns, residual.

The first two are policy-reversible (Fed could resume MBS buying); the others normalise on their own as the cycle proceeds. This is the technical basis for forecasts that mortgage spreads “should” compress over 2025-2026 — though forecasts of this kind have an embarrassing track record.

Practical takeaway for mortgage shoppers

1. Mortgage rates aren’t set by the Fed. They track the 10-year Treasury plus ~1.7 pp on average.
2. Today’s spread (~2.5 pp) is wider than the long-run average. That implies ~0.5-0.75 pp of potential downside in mortgage rates without any change in Treasury yields.
3. A Fed rate decision rarely moves mortgage rates more than 10 bp on the day — the bond market priced it weeks in advance.
4. The refinance break-even calculation should assume rates fall ~0.5 pp over the next 12-24 months; closing soon at today’s rate trades that option for certainty.

Sources

Freddie Mac Primary Mortgage Market Survey (weekly data 1971-present); US Treasury Daily Treasury Yield Curve Rates; Federal Reserve Bank of New York “The Spread Between Primary Mortgage Rates and Treasury Yields” (Liberty Street Economics, 2023); JPMorgan Chase “US Fixed Income Strategy” Q4 2024 outlook.