The culprit behind the 50% surge in US housing prices lies hidden within the US Treasury yield curve.
2025-11-10 16:55:06
This article first briefly introduces how to use short-term US Treasury yields to predict the outcome of the December FOMC interest rate decision, and then explains the impact of the FOMC interest rate decision on US borrowing rates.
The presentation then included several charts illustrating the steepening of US Treasury yields, revealing market concerns about inflation and increased Treasury supply behind the steepening. Finally, it unveiled the relationship between US Treasury yields and the 50% surge in US housing prices.
Before we begin this discussion, let’s state some readily applicable conclusions. The 6-month Treasury yield has always been an effective leading indicator of the Federal Reserve’s next interest rate move—the market interprets the Fed’s policy statements, officials’ speeches, and press conferences word for word, and the current yield suggests that the Fed will hold rates steady in December.
Last Friday, the yield closed at 3.80% (red line), within the shaded area of the Federal Reserve's EFFR ( Effective Federal Funds Rate, a benchmark interest rate that tracks current overnight interbank lending activity and is the core anchor of the Fed's policy rate ) target range of 3.75%-4.0%.
Just before the Federal Reserve cut interest rates in October, the yield had fallen to 3.75% and was trending downwards, but the trend has since completely reversed.
The fluctuation of the 6-month yield reflects the market's expectations for the Federal Reserve's policy rate over the next two months and is a core indicator for judging the bond market's prediction of the Fed's policy rate range.
It accurately predicted the two most recent interest rate cuts, and also successfully foresaw the first four interest rate cuts in 2024. It also performed exceptionally well during the interest rate hike cycle in 2023 (except for the period of bank panic in March 2023).
This yield is primarily based on changes in Federal Reserve policy signals; sudden panic events are considered unexpected shocks. Furthermore, in early 2024, when the market was generally caught up in a frenzy of interest rate cuts, this yield incorrectly predicted short-term rate reductions.
(Chart showing the overlay of the US June Treasury yield and EFFR)
Last Friday, the yield on the 10-year U.S. Treasury note closed at 4.11%, roughly unchanged from the level of the previous seven trading days. It rose 12 basis points from October 28 (the day before the Fed cut rates) and has risen a cumulative 48 basis points from September 2024, when the yield on the 10-year Treasury note was 3.63%.
The yield on 30-year US Treasury bonds rose to 4.70%, compared to 4.55% before the Fed's October rate cut and 3.94% before the September 2024 rate cut. The Fed has now cut rates by a total of 150 basis points, while the yield on 30-year US Treasury bonds has risen by 76 basis points in the same period.
This phenomenon reflects that long-term yields are determined by the endogenous dynamics of the bond market, rather than being directly dominated by the Federal Reserve's short-term policy rates.
(Chart showing the trend of US 10-year yield; yields rose instead of falling after the start of the US interest rate cut cycle)
Since the Federal Reserve cut interest rates at the end of October, the yield curve for all maturities of US Treasury bonds, from 3 months to 30 years, has risen across the board, and mortgage rates have also climbed in tandem.
However, the real federal funds rate (EFFR) fell 25 basis points to 3.87% after the October rate cut (blue line in the chart).
The current 10-year US Treasury yield is 4.11% (red line), 24 basis points higher than the EFFR. Under normal credit conditions, long-term yields such as the 10-year US Treasury yield are generally higher than short-term yields such as the EFFR, and there is usually a significant interest rate spread.
When short-term yields are higher than long-term yields, an "inverted yield curve" is formed. Since the beginning of this year, the yield curve of 10-year US Treasury bonds and the EFFR has repeatedly shown alternating patterns of inversion and correction.
(Chart showing the overlay of the US 30-year Treasury yield and EFFR)
The core concerns in the long-term bond market are inflationary pressures and the expansion of bond supply, and the bond market has always been cautious about these issues.
The bond market is concerned about the Federal Reserve's ineffective response to inflationary pressures, while also worrying about a surge in new bond supply caused by expanding government deficits.
If inflation continues to accelerate—with service inflation, which accounts for about 65% of the inflation basket, being the main driver, and commodity inflation rising in tandem—the bond market may demand higher yields to compensate for the two major risks of inflation and supply.
The yield on the 30-year U.S. Treasury note closed at 4.70% on Friday, up 15 basis points from the day before the Federal Reserve cut interest rates at the end of October.
The upward trend in the 30-year US Treasury yield began in August 2020, after briefly hitting a low of 1.0% in March 2020.
The yield was previously suppressed by the Federal Reserve's massive quantitative easing (QE) policy, rising to 2.0% at the end of 2021; since October 2023, it has repeatedly approached the 5% mark.
The volatility of the 30-year US Treasury yield is primarily driven by bond market fundamentals, including expectations of future inflation and the pressure to absorb new bond supply, rather than adjustments to the Federal Reserve's short-term policy interest rates.
It is also worth noting that EFFR rose slightly during the repo market turmoil at the end of October, but the market volatility gradually subsided last week.
Last fall, the Federal Reserve cut interest rates by a total of 100 basis points in four months, which directly triggered a 100 basis point surge in the 10-year Treasury yield. This market response taught the Fed a crucial lesson, causing it to pause its subsequent rate-cutting process and adopt a hawkish stance, ultimately successfully guiding long-term yields and mortgage rates down.
Subsequently, in September and October 2025, the Federal Reserve restarted its rate-cutting cycle, but with greater caution. After the October rate cut, the Fed remained open to the possibility of a December rate cut, partly to avoid further sharp fluctuations in the bond market.
A steepening of the US yield curve typically indicates rising market expectations of weak economic growth and inflation.
Since the last interest rate cut, the yield curve has generally risen. The chart below shows the full-maturity US Treasury yield curve (1-month to 30-year) at three key time points in 2025:
The longer the yield curve has, the more significantly it is affected by inflation concerns and supply pressures—both of which are currently at high levels. The steepening of the yield curve eased slightly after the second rate cut, but it became even steeper again at the time of the third hawkish rate cut.
(Yield curve at the three points when the Federal Reserve announced interest rate cuts)
Following the Federal Reserve's rate cut, the yield curve for US Treasury bonds from 3 months to 30 years rose across the board, and mortgage rates also increased. The bond market is deeply concerned about two major risks: inflationary pressures and the expansion of bond supply.
The yield on 6-month US Treasury bonds implies the expectation that the Federal Reserve will keep interest rates unchanged in December. Rate cuts during an accelerating inflation cycle are highly sophisticated, and the bond market has always been cautious about them.
Mortgage rates have risen again since the Federal Reserve cut interest rates in October. Daily monitoring data from Mortgage News shows that the average rate for a 30-year fixed mortgage has risen 22 basis points since before the October rate cut, reaching 6.32% last Friday.
Before the Federal Reserve launched its QE policy during the financial crisis, which distorted interest rates, mortgage rates of 6%-7% were the lower end of the normal range.
The reason why mortgage rates of 6%-7% have become the focus of the market is that housing prices surged by 50% or more in just two years from mid-2020 to mid-2022—while housing prices had been rising for many years prior, causing the current housing price level to deviate from the support of economic fundamentals.
However, this surge in housing prices was essentially a product of the Federal Reserve's aggressive monetary policy: at that time, inflation had begun to spread and once approached 9%, but the Federal Reserve artificially suppressed the 30-year fixed mortgage rate to below 3%, creating a negative real mortgage rate of -3%, -4% or even lower—an environment of almost "free funds," which caused homebuyers' rational decision-making to fail and their price sensitivity to drop significantly. This irrational prosperity was ultimately unsustainable.
(Chart showing the trend of 30-year US Treasury yield minus CPI)
The presentation then included several charts illustrating the steepening of US Treasury yields, revealing market concerns about inflation and increased Treasury supply behind the steepening. Finally, it unveiled the relationship between US Treasury yields and the 50% surge in US housing prices.
The 6-month Treasury yield is a leading indicator of the Federal Reserve's December policy.
Before we begin this discussion, let’s state some readily applicable conclusions. The 6-month Treasury yield has always been an effective leading indicator of the Federal Reserve’s next interest rate move—the market interprets the Fed’s policy statements, officials’ speeches, and press conferences word for word, and the current yield suggests that the Fed will hold rates steady in December.
Last Friday, the yield closed at 3.80% (red line), within the shaded area of the Federal Reserve's EFFR ( Effective Federal Funds Rate, a benchmark interest rate that tracks current overnight interbank lending activity and is the core anchor of the Fed's policy rate ) target range of 3.75%-4.0%.
Just before the Federal Reserve cut interest rates in October, the yield had fallen to 3.75% and was trending downwards, but the trend has since completely reversed.
The fluctuation of the 6-month yield reflects the market's expectations for the Federal Reserve's policy rate over the next two months and is a core indicator for judging the bond market's prediction of the Fed's policy rate range.
It accurately predicted the two most recent interest rate cuts, and also successfully foresaw the first four interest rate cuts in 2024. It also performed exceptionally well during the interest rate hike cycle in 2023 (except for the period of bank panic in March 2023).
This yield is primarily based on changes in Federal Reserve policy signals; sudden panic events are considered unexpected shocks. Furthermore, in early 2024, when the market was generally caught up in a frenzy of interest rate cuts, this yield incorrectly predicted short-term rate reductions.
(Chart showing the overlay of the US June Treasury yield and EFFR)
The Federal Reserve has begun a rate-cutting cycle, but US Treasury yields have risen instead of falling.
Last Friday, the yield on the 10-year U.S. Treasury note closed at 4.11%, roughly unchanged from the level of the previous seven trading days. It rose 12 basis points from October 28 (the day before the Fed cut rates) and has risen a cumulative 48 basis points from September 2024, when the yield on the 10-year Treasury note was 3.63%.
The yield on 30-year US Treasury bonds rose to 4.70%, compared to 4.55% before the Fed's October rate cut and 3.94% before the September 2024 rate cut. The Fed has now cut rates by a total of 150 basis points, while the yield on 30-year US Treasury bonds has risen by 76 basis points in the same period.
This phenomenon reflects that long-term yields are determined by the endogenous dynamics of the bond market, rather than being directly dominated by the Federal Reserve's short-term policy rates.
(Chart showing the trend of US 10-year yield; yields rose instead of falling after the start of the US interest rate cut cycle)
An inverted yield curve has emerged between long-term and short-term government bonds.
Since the Federal Reserve cut interest rates at the end of October, the yield curve for all maturities of US Treasury bonds, from 3 months to 30 years, has risen across the board, and mortgage rates have also climbed in tandem.
However, the real federal funds rate (EFFR) fell 25 basis points to 3.87% after the October rate cut (blue line in the chart).
The current 10-year US Treasury yield is 4.11% (red line), 24 basis points higher than the EFFR. Under normal credit conditions, long-term yields such as the 10-year US Treasury yield are generally higher than short-term yields such as the EFFR, and there is usually a significant interest rate spread.
When short-term yields are higher than long-term yields, an "inverted yield curve" is formed. Since the beginning of this year, the yield curve of 10-year US Treasury bonds and the EFFR has repeatedly shown alternating patterns of inversion and correction.
(Chart showing the overlay of the US 30-year Treasury yield and EFFR)
Exploring the Reasons for the Increase in Long-Term Returns Instead of Decreasing
The core concerns in the long-term bond market are inflationary pressures and the expansion of bond supply, and the bond market has always been cautious about these issues.
The bond market is concerned about the Federal Reserve's ineffective response to inflationary pressures, while also worrying about a surge in new bond supply caused by expanding government deficits.
If inflation continues to accelerate—with service inflation, which accounts for about 65% of the inflation basket, being the main driver, and commodity inflation rising in tandem—the bond market may demand higher yields to compensate for the two major risks of inflation and supply.
The yield on the 30-year U.S. Treasury note closed at 4.70% on Friday, up 15 basis points from the day before the Federal Reserve cut interest rates at the end of October.
The upward trend in the 30-year US Treasury yield began in August 2020, after briefly hitting a low of 1.0% in March 2020.
The yield was previously suppressed by the Federal Reserve's massive quantitative easing (QE) policy, rising to 2.0% at the end of 2021; since October 2023, it has repeatedly approached the 5% mark.
The volatility of the 30-year US Treasury yield is primarily driven by bond market fundamentals, including expectations of future inflation and the pressure to absorb new bond supply, rather than adjustments to the Federal Reserve's short-term policy interest rates.
It is also worth noting that EFFR rose slightly during the repo market turmoil at the end of October, but the market volatility gradually subsided last week.
The Federal Reserve's interest rate cuts may become a negative example and a lesson from history.
Last fall, the Federal Reserve cut interest rates by a total of 100 basis points in four months, which directly triggered a 100 basis point surge in the 10-year Treasury yield. This market response taught the Fed a crucial lesson, causing it to pause its subsequent rate-cutting process and adopt a hawkish stance, ultimately successfully guiding long-term yields and mortgage rates down.
Subsequently, in September and October 2025, the Federal Reserve restarted its rate-cutting cycle, but with greater caution. After the October rate cut, the Fed remained open to the possibility of a December rate cut, partly to avoid further sharp fluctuations in the bond market.
Full-term yield curve: a comparison of trends before and after interest rate cuts
A steepening of the US yield curve typically indicates rising market expectations of weak economic growth and inflation.
Since the last interest rate cut, the yield curve has generally risen. The chart below shows the full-maturity US Treasury yield curve (1-month to 30-year) at three key time points in 2025:
The longer the yield curve has, the more significantly it is affected by inflation concerns and supply pressures—both of which are currently at high levels. The steepening of the yield curve eased slightly after the second rate cut, but it became even steeper again at the time of the third hawkish rate cut.
(Yield curve at the three points when the Federal Reserve announced interest rate cuts)
Summary: After the interest rate cut, yields and mortgage rates rose in tandem.
Following the Federal Reserve's rate cut, the yield curve for US Treasury bonds from 3 months to 30 years rose across the board, and mortgage rates also increased. The bond market is deeply concerned about two major risks: inflationary pressures and the expansion of bond supply.
The yield on 6-month US Treasury bonds implies the expectation that the Federal Reserve will keep interest rates unchanged in December. Rate cuts during an accelerating inflation cycle are highly sophisticated, and the bond market has always been cautious about them.
Unveiling the US Housing Price Surge: Current Situation and Historical Policy Origins
Mortgage rates have risen again since the Federal Reserve cut interest rates in October. Daily monitoring data from Mortgage News shows that the average rate for a 30-year fixed mortgage has risen 22 basis points since before the October rate cut, reaching 6.32% last Friday.
Before the Federal Reserve launched its QE policy during the financial crisis, which distorted interest rates, mortgage rates of 6%-7% were the lower end of the normal range.
The reason why mortgage rates of 6%-7% have become the focus of the market is that housing prices surged by 50% or more in just two years from mid-2020 to mid-2022—while housing prices had been rising for many years prior, causing the current housing price level to deviate from the support of economic fundamentals.
However, this surge in housing prices was essentially a product of the Federal Reserve's aggressive monetary policy: at that time, inflation had begun to spread and once approached 9%, but the Federal Reserve artificially suppressed the 30-year fixed mortgage rate to below 3%, creating a negative real mortgage rate of -3%, -4% or even lower—an environment of almost "free funds," which caused homebuyers' rational decision-making to fail and their price sensitivity to drop significantly. This irrational prosperity was ultimately unsustainable.
(Chart showing the trend of 30-year US Treasury yield minus CPI)
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