How the 1-Year Treasury Yield Affects and Predicts U.S. Mortgage Interest Rates

Understanding the 1-Year Treasury Yield

The 1-year Treasury yield is essentially the interest rate the U.S. government pays to borrow money for one year. In simple terms, it’s the return investors demand for lending their money to the government for 12 months. This yield is decided by auctions and the broader bond market: the U.S. Treasury issues short-term securities (like 1-year Treasury bills), and investors bid to buy them. If there’s high demand for these safe government bonds, they get sold at higher prices, which lowers the yield (since the government ends up paying less interest for the funds raised). Conversely, if investors aren’t eager to buy, the Treasury must offer a higher interest rate to attract buyers, so the yield rises.

How is the 1-year Treasury yield determined? It boils down to supply and demand, as well as expectations about the economy. Yields on Treasury securities at “constant maturity” (like the 1-year rate) are published by the Federal Reserve based on closing market yields​. In practical terms, when investors believe the economy is stable and inflation will stay low, they’re willing to lend to the government at lower rates. But if they expect higher inflation or think the Federal Reserve will raise short-term interest rates soon, they’ll demand a higher 1-year yield to compensate for that future risk​.

Why does the 1-year Treasury yield change? A key reason is that it’s influenced by short-term interest rate expectations. The Federal Reserve (the U.S. central bank) has a big hand here: while the Fed doesn’t directly set the 1-year yield, it sets the federal funds rate (an overnight lending rate for banks), which guides short-term interest rates in general. If the Fed signals it will increase rates to fight inflation, short-term Treasury yields like the 1-year tend to rise in anticipation​. On the other hand, if the Fed is expected to cut rates because of economic troubles, the 1-year yield usually falls. Inflation is another major factor – if investors expect prices to rise quickly, a fixed 1-year bond is less attractive unless it offers a higher yield to offset the loss of purchasing power​. In essence, the 1-year Treasury yield moves as investors constantly react to news about Fed policy, inflation, and the economy. Historically, this yield has seen dramatic swings. In the early 1980s, amid efforts to tame runaway inflation, the 1-year Treasury yield shot up to around 17%​. By contrast, in the aftermath of the 2008 financial crisis and through the 2010s, it dropped near 0% as the Fed slashed rates to boost the economy​. These extremes show how much economic conditions can affect the rate the government must pay to borrow for one year.

How U.S. Mortgage Interest Rates Are Set

Mortgage interest rates in the United States are the rates you pay to borrow money for a home loan. They are influenced by many factors, but two of the biggest are the overall interest rate environment and the type of mortgage (fixed-rate vs. adjustable-rate). Here’s how it works in a nutshell:

• Lenders’ costs and competition: Banks and mortgage lenders set rates partly based on their own cost of money and desired profit. If market interest rates rise (for example, if the Federal Reserve has pushed rates up), it becomes more expensive for lenders to obtain funds, so they will charge higher mortgage rates to borrowers. Conversely, if their own costs drop, they can offer loans more cheaply. Competition also plays a role – lenders watch each other and try to offer attractive rates, but they all face the same general rate environment.

• Fixed-rate mortgages and the 10-year Treasury: Fixed-rate mortgages (like the popular 30-year fixed loan) have interest rates that stay the same for the life of the loan. Lenders typically use longer-term Treasury yields – especially the 10-year Treasury note yield – as a benchmark when setting these rates. The 10-year yield is important because investors who fund mortgages (through buying mortgage-backed securities) compare returns to that relatively safe Treasury note. In general, when the 10-year Treasury yield goes up, fixed mortgage rates tend to go up, and when the 10-year yield falls, fixed mortgage rates tend to fall as well​. Historically, 30-year fixed mortgage rates have been roughly 1.5–2 percentage points higher than the 10-year Treasury yield on average​. (That extra margin accounts for the additional risks of a mortgage.) So if the 10-year Treasury is at 4%, lenders might offer 30-year fixed mortgages around 5.5%–6%. This spread can widen or shrink depending on economic conditions, but the 10-year yield gives a ballpark reference for where fixed mortgage rates are.

• Adjustable-rate mortgages (ARMs) and short-term rates: Adjustable-rate mortgages are loans where the interest rate can change at set intervals after an initial fixed period. For example, a “5/1 ARM” has a fixed rate for the first 5 years, then adjusts annually. Lenders decide how an ARM adjusts by tying it to an index – often the 1-year Treasury yield (specifically, the 1-year Treasury Constant Maturity index) or another benchmark. They then add a fixed margin (say 2.5%) to that index. So if your ARM is indexed to the 1-year Treasury and has a 2.5% margin, and the 1-year Treasury yield is 3% at reset time, your new rate will be 3% + 2.5% = 5.5%. If a year later the index rises to 4%, your rate would jump to 6.5%; if it drops to 2%, your rate would fall to about 4.5%. In short, your ARM payment moves up or down with that index. Crucially, about half of all ARMs in the U.S. are tied to the 1-year Treasury index​. When this index goes up, those mortgage rates go up; when it goes down, they go down​. The 1-year Treasury yield can be volatile and responds quickly to economic changes, which means ARM borrowers often see their rates change more frequently (within the limits of any caps on their loan) compared to borrowers with long-term fixed rates.

• Other factors: Mortgage rates also take into account individual factors like a borrower’s credit score, the size of the down payment, the loan type, etc. Those determine the specific rate a lender offers you versus someone else. But the movement of mortgage rates over time – whether rates in general are rising or falling – is driven largely by the broader economic forces and benchmarks mentioned above.

The Link Between Treasury Yields and Mortgage Rates

So, how does the 1-year Treasury yield actually affect and even help predict mortgage interest rates? There are a couple of key connections:

1. Direct influence on adjustable-rate mortgages (ARMs): Many ARMs use the 1-year Treasury yield as their benchmark index. This creates an almost automatic link. When the 1-year Treasury yield goes up, interest rates on those ARMs will also go up at the next adjustment period (and vice versa when the yield goes down)​. For instance, if you have an ARM and the 1-year Treasury yield has climbed significantly since your last reset, your new mortgage rate will be higher, simply because the index it’s tied to rose. We’ve seen this happen historically: when the Fed rapidly raised rates and short-term yields spiked, ARM borrowers often experienced sharp increases in their monthly payments. On the flip side, when the 1-year yield falls, ARM borrowers can get relief in the form of lower rates and payments after their loan resets.

2. Indirect influence on fixed mortgage rates (economic signal): Fixed mortgage rates aren’t pegged to the 1-year yield, but the 1-year yield often serves as an early warning signal for the overall interest rate environment. The 1-year moves quickly based on what the Fed is doing or expected to do. If investors think the Fed will hike rates aggressively (say, due to rising inflation), the 1-year Treasury yield might jump in anticipation. That surge is a sign that borrowing costs across the board are likely to increase. In response, lenders may start raising fixed mortgage rates even if longer-term yields (like the 10-year) haven’t moved as dramatically yet. Conversely, if the 1-year yield is trending down because the Fed is cutting rates or inflation fears are easing, it can foreshadow a drop in mortgage rates. In general, short-term and long-term interest rates tend to move in the same direction over time​. Long-term rates might lag a bit or not move as sharply, but they eventually follow the overall trend. So a sustained rise in the 1-year yield often precedes higher 15-year and 30-year mortgage rates, while a sustained fall in the 1-year yield often presages lower mortgage rates.

One thing to note: fixed mortgage rates are more directly influenced by longer-term yields (like the 10-year Treasury), so sometimes you’ll see a disconnect in the short run. For example, there have been periods when the 1-year yield rose faster than the 10-year yield. In 2022, the Fed’s rapid rate hikes caused the 1-year Treasury yield to leap above 4%​, while the 10-year Treasury yield was around 3.5–4%. Even so, as long as overall Treasury yields remain high, mortgage rates will remain high too​. The gap between short-term and long-term rates can affect whether ARMs or fixed loans are relatively more expensive at a given moment, but the key takeaway is that when the government’s borrowing costs rise, consumer borrowing costs (including home loans) rise as well.

Historical Examples: When Treasury Yields Moved Mortgage Rates

Let’s look at a few real-world scenarios where changes in the 1-year Treasury yield went hand-in-hand with changes in mortgage rates:

Early 1980s: Sky-High Rates

In the late 1970s and early 1980s, the U.S. experienced very high inflation. The Federal Reserve, led by Paul Volcker, responded by drastically raising short-term interest rates – the federal funds rate was pushed to near 20%. Treasury yields of all maturities skyrocketed. In 1981, the 1-year Treasury yield peaked around 17.3%​. As a result, borrowing became extremely expensive everywhere. That same year, average 30-year fixed mortgage rates hit about 16.6%​, the highest on record. Essentially, money itself was costly to borrow. This period shows the strong link between a surging 1-year yield (driven by Fed tightening to combat inflation) and soaring mortgage rates. For anyone looking to buy a home then, it meant paying interest rates that sound unimaginable today, making home ownership far less affordable.

Mid-2000s: Rising Yields Trigger ARM Payment Shocks

During 2004–2006, the Federal Reserve steadily increased its benchmark rates from 1% up to 5.25%. The 1-year Treasury yield rose in tandem as markets anticipated and reacted to these hikes. At the same time, many homebuyers had taken out adjustable-rate mortgages in the early 2000s when rates were low. As those ARMs began to reset around 2006–2007, the jump in the 1-year Treasury index translated into much higher mortgage rates for those borrowers. For example, an ARM that started around 4% could reset to 7% or higher once the index caught up to the Fed’s new rate environment. One analysis showed that as the Fed hiked rates from 1% to 5.25% (and the 1-year Treasury yield followed along), some ARM borrowers saw their monthly payments surge by 30–40% after the reset​. This kind of payment shock hit many families and was one factor contributing to the wave of mortgage defaults that led into the 2008 financial crisis. It was a harsh lesson: a rapidly rising 1-year Treasury yield can spell trouble for anyone with an adjustable-rate loan.

Early 2020s: Inflation Surge and Mortgage Rate Spike

After a long period of low interest rates, the early 2020s saw inflation return in a big way. In 2022, the Federal Reserve reacted by embarking on one of the fastest series of rate hikes in decades to try to rein in inflation. Short-term interest rates, including the 1-year Treasury yield, shot up. In fact, the 1-year yield jumped from near 0% in early 2021 to over 4% by late 2022​. Mortgage rates followed suit almost immediately. At the start of 2022, you could get a 30-year fixed mortgage around 3%; by the end of 2022, average 30-year fixed rates were about 7% – the highest in 20 years. This swift rise was very much in line with the surge in Treasury yields. Borrowers with adjustable-rate mortgages who had enjoyed low rates found their rates resetting much higher as the 1-year index climbed. Meanwhile, the difference between the 30-year mortgage rate and the 10-year Treasury yield (the mortgage spread) widened to nearly 3 percentage points​, a level last seen during the 2008 crisis, reflecting the extra uncertainty and risk in the system at that time. In short, the spike in the 1-year Treasury yield was like a loud alarm bell for the mortgage market – and sure enough, anyone shopping for a home loan in 2022–2023 felt the impact of that alarm in the form of sharply higher interest costs.

The Role of the Fed, Inflation, and Economic Indicators

We’ve mentioned the Federal Reserve and inflation already; these are central to understanding why Treasury yields (and thus mortgage rates) move. Here’s a quick recap of their roles and other key economic indicators:

• Federal Reserve policy: The Fed doesn’t set mortgage rates directly, but its actions have a huge influence. When the Fed raises the federal funds rate (its main short-term rate), it usually leads to higher yields on short-term Treasuries like the 1-year​. It’s effectively raising the floor of interest rates in the economy. Lenders then face higher costs and will raise the rates they charge on mortgages and other loans. Conversely, when the Fed cuts rates or signals a more accommodating stance, short-term Treasury yields tend to fall, and mortgage rates often ease as well. Think of the Fed as steering the ship of overall interest rates – if it turns the wheel toward higher rates, all the boats (from Treasury yields to mortgage rates) eventually follow that direction. As one source put it, the Fed’s decisions don’t fix mortgage rates, but they set the tone that lenders respond to​.

• Inflation expectations: Inflation is a key driver of interest rates. If investors expect higher inflation, they will demand higher yields on bonds, including Treasuries, to compensate for the loss of purchasing power over time​. For example, if the annual inflation rate is expected to be 4%, a 1-year Treasury yielding 3% would actually represent a loss in real value, so investors would push that yield up until it’s high enough (maybe above 4%) to make lending worthwhile. When Treasury yields rise due to inflation fears, mortgage rates are pushed up too, since investors and banks also don’t want to lend at rates lower than inflation. On the other hand, if inflation is expected to stay low or fall, there’s less pressure on yields. In 2020 and 2021, for instance, inflation was very low and so were Treasury yields and mortgage rates. By 2022, inflation spiked – and as those expectations of higher inflation set in, all interest rates, from Treasuries to home loans, climbed. So, pay attention to inflation news: rising inflation often heralds higher mortgage rates, while easing inflation can be a precursor to lower rates.

• Economic indicators and sentiment: Various economic reports can sway Treasury yields from day to day. Strong economic data – like a booming jobs report or high consumer spending – often causes yields to rise, because a hot economy can lead to inflation and prompts the Fed to consider raising rates. When Treasury yields jump on such news, mortgage rates may soon follow. Conversely, weak economic data or a surge of negative sentiment (say, concerns about a recession) can send investors rushing into the safety of Treasury bonds, driving yields down. Mortgage rates might then dip in response, as the whole lending environment becomes more accommodating. Essentially, anything that changes the outlook for growth and inflation will likely move Treasury yields, and mortgage rates will adjust in the same direction sooner or later.

How Homebuyers and Investors Can Use This Information

Understanding the link between the 1-year Treasury yield and mortgage rates can help you make savvier decisions about financing a home. Here are some practical tips for prospective homebuyers and real estate investors:

• Watch the interest rate trend: Keep an eye on the 1-year Treasury yield (and other rates) over time. If you see it steadily rising over weeks or months, that’s a sign mortgage rates are likely on the upswing as well. In that case, if you’re shopping for a home loan, you might want to lock in a decent rate now rather than waiting, because delays could mean you end up with a higher rate. Most lenders allow you to lock a rate for a set period while you close on a house. On the flip side, if the 1-year yield has been falling and economic signs point to potential Fed rate cuts, mortgage rates might drift down too. You could choose a shorter lock period or even hold off briefly to see if you can get a slightly better deal. The goal isn’t to perfectly time the market (which is hard), but to be aware of the direction things are moving in.

• Fixed-rate vs. ARM – weigh the environment: The interest rate environment (which the 1-year Treasury reflects) can influence which type of mortgage is more attractive. When short-term rates are much lower than long-term rates (a normal situation when the yield curve slopes upward), ARMs tend to have lower initial rates than fixed mortgages. In those times, if you expect to move or refinance in a few years, an ARM could save you money. However, if short-term rates are rising fast or are already high relative to long-term rates (like in an inverted yield curve scenario), an ARM might adjust to a costly rate later. If the 1-year yield is high now, it means future ARM adjustments will likely be high too. In such cases, a fixed-rate mortgage, which locks in your rate, might be the safer bet. Always consider your personal plans: if you plan to own the property for a long time or just prefer stability, leaning toward a fixed rate makes sense in a rising rate climate. If you have more flexibility and the rate gap is big, an ARM might be worth the risk in a stable or falling rate climate.

• Use Fed signals as a guide: Federal Reserve meetings and statements are like weather reports for interest rates. When the Fed strongly hints at raising rates (because the economy is strong or inflation is high), it’s a cue that Treasury yields and mortgage rates could climb further. As a homebuyer, that might urge you to expedite your purchase or lock your rate sooner. Conversely, if the Fed indicates it might pause rate hikes or even cut rates (perhaps due to a slowing economy), that suggests we might be near a turning point where mortgage rates level off or start easing. While you don’t need to parse every word of Fed announcements, paying attention to the general direction of Fed policy can help your timing. The same goes for big economic reports: a few months of lower inflation readings, for instance, might pave the way for lower rates ahead – useful insight if you’re deciding whether to buy now or wait a bit.

• Think about refinancing or rate adjustments: If you already have a mortgage, especially an ARM or a home equity line of credit, tracking interest rate trends is still important. Say you have an ARM that’s due to reset soon – knowing that the 1-year Treasury yield has jumped a lot since your last reset can prepare you for a higher rate (or spur you to refinance into a fixed loan before that happens). Alternatively, if rates have fallen substantially since you got your mortgage, you might consider refinancing to a lower fixed rate to save money. Real estate investors often refinance loans when rates drop to reduce their costs. Just as you’d want to lock in a low rate when buying, you want to seize opportunities to restructure your debt when the interest climate improves.

• Broader market context: Remember that interest rates can also influence housing demand. High mortgage rates (often accompanying high Treasury yields) can cool down homebuying demand because loans become pricier, which might slow home price growth. Low rates can do the opposite, stimulating buying and potentially driving prices up. If you’re an investor, a high-rate environment might mean fewer buyers competing for properties (potentially better purchase prices for you), but also higher holding costs if you’re borrowing. For homebuyers, high rates might reduce competition and push sellers to be more flexible, but you’ll want to ensure you can afford the monthly payments at those rates (or plan to refinance if rates drop later). In short, use the information on rates not just for the loan itself, but to gauge the wider real estate market’s temperature.

Conclusion

The world of interest rates and bonds might seem far removed from buying a house, but as we’ve seen, they’re tightly connected. The 1-year Treasury yield is a key indicator that reflects what’s happening with short-term interest rates in the economy, and it has a tangible effect on what borrowers pay for mortgages in the U.S. When this yield rises, it’s often a sign that all borrowing costs (including mortgage rates) are rising, and when it falls, it can signal relief for borrowers.

We’ve explained how the 1-year Treasury yield is determined by market forces and influenced by the Federal Reserve’s fight against inflation or recession. We’ve also seen how mortgage lenders peg adjustable-rate loans to this yield and take cues from it (along with other Treasury yields) for setting fixed-rate loans. Real historical cases – from the sky-high rates of the 1980s to the spikes of the early 2020s – show that if it costs the U.S. government a lot more or a lot less to borrow money for a year, everyday people will soon feel that change when they go to get a home loan.

For homebuyers and real estate investors, keeping an eye on Treasury yields is a bit like watching the weather forecast. It won’t tell you exactly what day to make your move, but it gives you a sense of the climate. If the forecast (rates) looks stormy, you might carry an umbrella (lock in a fixed rate). If it’s sunny and calm, you might take a bit more time or consider different options. In simple terms: when it costs Uncle Sam more to borrow money, it will likely cost you more to borrow for a house – so plan accordingly. By understanding this relationship, you can make more informed decisions about when to buy, what kind of mortgage to choose, and when it might be wise to refinance.