Identification

• The United States government issues treasury securities to finance itself. Treasuries are actually debt securities, in which investors earn interest, in exchange for making these loans. Treasuries are described as risk-free securities. The federal government maintains authority to tax citizens and run the printing presses to create money—for meeting principal and interest payments.
  
  Because of the risk-reward trade-off and similar maturity dates, 10- and 30-year treasuries serve as primary benchmarks for all mortgages, especially the 30-year fixed variety. The risk-reward trade-off specifies that investors demand higher rates of return for accepting increased levels of risk. Therefore, banks negotiate higher mortgage rates to compensate themselves for making riskier loans to homeowners.
  
  In comparison, banks could simply buy treasury bonds and loan money to the U.S. government at guaranteed rates of return for 30 years. Homeowners, however, are susceptible to job losses, medical conditions and divorce proceedings that can jeopardize their ability to make mortgage payments.
  
  

Features

• The Federal Reserve Board uses treasury securities as instruments to carry out monetary policy and manage the economy. During a recession, the Federal Reserve Board works to lower prevailing interest rates. Lower interest rates translate into reduced borrowing costs, which encourage individuals to take out loans and make investments. The Federal Reserve buys outstanding treasury debt to increase the money supply and effectively lower mortgage interest rates. Conversely, the Federal Reserve targets higher interest rates to slow down the economy and combat inflation. The Fed then sells treasury securities to the public, which reduces the money supply in circulation, and supports higher interest rates for mortgages and all credit securities.
  
  

Considerations

• Treasuries and mortgage rates affect real estate activity and investment returns. Lower mortgage rates generally support higher prices for real estate. At that point, property demand increases, because prospective buyers have higher chances for loan approval, alongside the additional buying power that comes with reduced mortgage financing costs. Alternatively, higher interest rates adversely affect the property market. Higher interest rates generally precede falling home prices and sales, as prospective buyers are declined mortgages, or refuse to accept expensive financing.
  
  

Warning

• Your personal mortgage rate offerings may not track the average treasury and mortgage rates. Banks make interest rate decisions on a case-by-case basis and demand higher interest rates from riskier borrowers. Higher mortgage rates should be expected for investment properties, and in situations in which borrowers present weak cash flow figures above prospective housing expenses.
  
  

Strategy

• The Wall Street Journal publishes Federal Reserve monetary policy announcements daily, together with prevailing interest rates for mortgages and treasury securities. Stay current on benchmark interest rates, while managing your own debt responsibly to qualify for an ideal mortgage. Track your debt management progress by ordering one free credit report per year, such as one available from annualcreditreport.com.