Here are some important snippets from a main article that will break it down for you.
“Rates on longer-term loans, such as the 15-year and 30-year fixed mortgages, are driven by 1-year, 5-year, and 10-year Treasury Note yields. These are auctioned on the open market, and the yields respond to market demand. If there is a great demand for these bonds, then the yields can be low. If there is not much demand, then the yields need to be high to attract investors. ”
“Treasury Note: Like any loan, the interest rates are fixed. However, Treasury notes are auctioned to the highest bidder. Depending on the demand at auction, the note could cost
more or less than face value. However, at the end of the note’s term, the U.S. Government pays back full face value to the bidder. In effect, bidders are loaning the bid amount to the U.S. Government. In return, they get the interest rate and the full face value.”
Essentially the mortgage interest rates have to be higher than the 10 year bonds because bonds are secure which obviously we are learning, mortgages are not very secure.
Here is a link to the 10 Year Treasury Graph but remember that it is not a linear relationship and there is a spread. And above is a great graph summing it all up about rates, the Fed and the Treasury.
graph via http://library.hsh.com/?row_id=90
