Mortgage rates are having a tough time. In just over a month, they rose by a percentage point to around 7.5%, a three-year high. Buyers are backing off in response, and September home sales appear poised for a sharp slowdown.
How did this happen? Blame it on rising bond yields around the world. Mortgage rates are particularly sensitive to movements in the 10-year Treasury yield (^TNX), which has reached multi-year highs in recent weeks.
Learn more: How to get the lowest mortgage rates now
Analyzing what is causing bond yields to rise so quickly is more complicated. Economists point to a range of factors that are causing investors to rewrite their expectations for inflation and economic growth.
“There’s definitely a trend,” said Daryl Fairweather, chief economist at Redfin. “There’s something significant happening when we move toward a higher, more sustainable economy.”
While it’s impossible to predict where bond yields and mortgage rates will move, 8% loans now seem a not-so-distant possibility. Here’s why experts told Yahoo Finance that the current environment appears to be one where rates could remain high, or even continue to rise.
Oil prices and Iran
Mortgage rates soared in the weeks following the U.S. attack on Iran on Feb. 28, as investors worried about rising oil prices and their implications for inflation. Although oil prices have fallen from their peaks, concerns remain about how rising energy prices will flow through supply chains, potentially worsening inflation.
Besides oil prices themselves, general uncertainty over the situation in Iran is also pushing rates higher as investors want more compensation for unknown risks, said Jake Krimmel, senior economist at Realtor.com.
“Geopolitical uncertainty is a big part of it,” Krimmel said. “We’re talking about a supply shock. It’s not just oil, but probably everything else, trade.”
Meanwhile, Treasury Secretary Scott Bessent, who attempted to reduce bond yields through buybacks to little effect, blamed much of the rise in bond yields and mortgage rates on energy prices.
“I don’t know if this conflict is going to end next week, next month or in two months, but I believe that on the other hand, energy prices will be much lower and interest rates and mortgage rates will go down,” he said Monday.
Learn more: How Surging Treasury Yields Could Affect Your Finances
Economic growth
Yet few economists believe energy prices alone explain today’s higher rates, because the U.S. economy is showing the kind of growth that typically leads to higher bond yields and mortgage rates.
Paradoxically, good economic news can be bad for mortgage rates, and right now the economy is holding up well. Robust consumer spending helped increase gross domestic product by 2.2% per year in the second quarter, and recent measures of manufacturing activity and consumer spending continue to show healthy growth.
“Consumers continue to spend, and they are spending more in real terms, which tends to indicate a strong economy,” said Orphe Divounguy, founder and chief economist of Quantitative Research Group, a housing and economic consulting firm.
With a strong economy pushing inflation well above the Fed’s 2% target, “you have investors demanding additional compensation for holding long-term bonds,” which is pushing yields and mortgage rates higher, he added.
The AI boom
Although it may seem distant, the massive development of artificial intelligence is also influencing mortgage rates in multiple ways. Huge investments in data centers have contributed to the country’s recent economic growth, and the race to fund these investments could put further pressure on government bond yields as investors favor AI debt over Treasuries.
Metadata centers operate Saturday, Sept. 5, 2026, near Social Circle, Ga. (AP Photo/Mike Stewart) ·AP Photo/Mike Stewart
Tech companies have issued hundreds of billions of dollars in debt to finance their AI infrastructure spending. For bond investors, these deals may seem attractive: They offer higher yields than government bonds and are frequently issued by companies whose credit ratings are almost as good – or even better in the case of Microsoft – than those of the U.S. government.
Bond yields and prices have an inverse relationship, so as investors allocate money to AI debt and move away from alternatives such as Treasuries and mortgage-backed securities, yields and mortgage rates may increase.
“The AI spending boom may be having a crowding out effect on other types of similar investment instruments,” said Kara Ng, senior economist at Zillow.
Debt and public spending
Regardless of the AI trade, US government debt is considered a global safe haven. The depth and liquidity of the Treasury market and the strength and stability of the U.S. financial system generate strong demand from international investors, which contributes to lower yields.
But lately the whole system seems a little less secure.
The US national debt has ballooned since the pandemic and broke a record $40 trillion earlier this year. Some of the extra spending came from emergency measures put in place during COVID that were rolled back, but U.S. spending in major categories like social programs and defense regularly exceeds its revenue.
And as yields rise, more of the government’s money must go to paying interest on its growing debt. This confluence of factors can deter investors from Treasuries, pushing yields and mortgage rates even higher.
The Fed hike cycle
The Fed does not directly control mortgage rates, but its adjustments to the short-term federal funds rate influence their direction. Mortgage rates typically rise in anticipation of Fed actions, meaning expectations of a new rate hike cycle are already anchored in existing rates.
Central bank officials stressed that further rate increases are likely warranted to bring inflation down from its current level of 3.4%. Traders see an 86% chance of getting at least a 25 basis point hike by the end of the year, according to CME FedWatch.
By some measures, mortgage rates have fallen slightly from recent highs. Their 7.48% average Friday was a two-week low, according to Mortgage News Daily. But many risks — like higher inflation expectations — that could push mortgage rates to 8% remain, said Divounguy of the Quantitative Research Group.
“It’s not that long ago anymore,” Divounguy said. “It’s getting closer and closer to reality.”
Claire Boston is a senior reporter for Yahoo Finance, covering housing, mortgages and homeowners insurance.
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