Week-End Review 2/10/23
Understanding Mortgage-Backed Securities and the 10-Year Yield
If you’re a real estate buyer, you’ve probably heard of mortgage-backed securities (MBS) and the 10-year yield. But do you know how they’re related? Don’t worry, we’ll explain it in plain English so that even a caveman can understand. Let’s start with understanding MBS.
Mortgage-Backed Securities Explained
Mortgage-backed securities are investments in which a group of mortgages are pooled together and then sold to investors. These securities are like bonds and investors receive income from the interest payments made by homebuyers on their mortgages. The income is paid out until all the mortgages in the pool have been paid off or until their term length expires.
The 10-Year Yield
The 10-year yield is an interest rate that measures the return an investor receives from investing in government bonds with ten-year maturities. This rate is closely followed as it is often used as a benchmark for other investments such as mortgage-backed securities. That’s because when yields increase, mortgage rates also tend to increase due to supply and demand dynamics, meaning buyers of MBS can get higher returns on their investment than if they were to invest in shorter maturity bonds with lower yields.
Relationship Between Mortgage-Backed Securities and the 10 Year Yield
So now you know what mortgage-backed securities are and what the 10 year yield means – but how exactly are they related? The relationship between MBS and the ten-year yield is important because it gives investors an idea of how much return they can expect to receive from investing in MBS over time. When yields rise, more people will be willing to buy mortgage-backed securities since they will be able to make more money off of them as compared to other investments like government bonds or stocks with similar maturity lengths. As a result, lenders can charge higher rates for mortgages, which leads to higher rates for homebuyers who take out loans backed by MBS.
So, there you have it—the relationship between mortgage-backed securities and the ten year yield explained! In short, when yields go up, so do mortgage rates since lenders can charge more for loans backed by MBS due to increased demand from investors seeking higher returns on their investments. This means that if you’re looking into buying a home soon, keep an eye on current market conditions so that you’ll know if your loan cost may be affected by rising yields!