Miscommunication Shook Up Mortgage , Bond Markets

This decline in mortgage interest rates mirrored a fall in the 10-year Treasury bond yield (the interest rate on the bond), as shown in the left panel of Figure 1. In fact—as shown in the right panel of Figure 1—mortgage interest rates almost always mirror the yields on long-term Treasury bonds because they respond to the same forces. What factors drove the sharp declines in yields on 10-year Treasury bonds in the spring of 2003? Was the Federal Reserve responsible for the volatility, as some in the financial press have alleged? And why are mortgage interest rates closely linked to these Treasury yields in the first place? Mortgage interest rates dipped to record lows early last summer, providing homeowners with a refinancing bonanza.