How mortgage rates are set.

— Why the spread moves

Your mortgage rides the 10-year. The spread is where the drama lives.

The Fed funds rate is the overnight cost of money between banks. It controls short-term borrowing: credit cards, HELOCs, adjustable-rate loans. It does not control your 30-year fixed mortgage. A 30-year fixed is a long-duration asset priced off the 10-year Treasury, and the 10-year is set by a global bond market that cares about inflation expectations, growth expectations, and foreign demand. The Fed moves the front end. The bond market moves the back end. Your mortgage is a back-end instrument.

On top of the 10-year, the mortgage market adds a spread. Normally 150 to 200 basis points. That spread is mostly prepayment risk: the investor who holds your loan is short an option, because you can refinance whenever rates fall, handing them back their principal at the worst possible moment. When rate volatility rises, that option gets more valuable to you, which means the investor demands more yield to write it. Volatile rates mean a wider spread. Calm rates mean a tighter spread. The relationship is mechanical.

Then there is 2022 and 2023, which is why this chart looks the way it does. The Fed stopped buying mortgage-backed securities and started letting its holdings run off. Banks, post-SVB, pulled back from MBS. The natural buyer base for agency mortgages shrank at the exact moment rate volatility was the highest it had been in decades. The spread blew out past 300 bps and sat there for eighteen months. That was not a Fed story. That was a plumbing story in the secondary mortgage market, which is where your rate actually comes from.