Why the 10-Year's October Slide Didn't Reach Your Mortgage

October was an unusually clean test of a rule repeated every time Treasury yields move: mortgage rates follow the ten-year. The ten-year fell 26 basis points over the month, from 5.24% to 4.98%. The 30-year fixed rate fell 4 basis points, from 7.28% to 7.24%. Of the ground the benchmark gave up, a small fraction reached a borrower.

The reason is that a mortgage rate is not a Treasury yield plus a constant. It is set off the yield on newly issued agency mortgage-backed securities, and that security carries costs a Treasury bill of the same maturity does not: the guarantee fee, servicing, and the price of the option the borrower holds to refinance. When yields fall, that option gets more valuable to the borrower and more expensive to the investor, because the security repays early just as its duration was most useful. The spread is where that cost is charged.

Over the year the same asymmetry runs the other way. The mortgage rate is 108 basis points above its first reading of 2026 and the ten-year is 79 above its own. The spread went from 1.97 to 2.26 percentage points, so roughly a quarter of the increase in what a buyer pays is not a Treasury move at all. It is the mortgage market repricing its own risk.

That spread is not stable enough to be treated as a constant either. It ran from 1.81 in September to 2.36 in the third week of October, a range wider than the benchmark's entire monthly decline. Anyone forecasting a mortgage rate from a ten-year forecast is really forecasting two things and reporting one.

What would change this reading: the spread returning to where it started the year and staying there. If it closes back below its 2026 average for a month or more, pass-through is working again and the argument here no longer holds. Until then the ten-year is a floor under mortgage pricing, not a quote for it.