An all-new bond coupon issued in April allows for rates to go as low as 2.25% on the 30-year fixed.

How low could rates go? Rates on home loans loosely follow the yield on the 10-year U.S. Treasury. It is not an exact marriage, however, as the two have diverged recently given all the strange market conditions brought on by the coronavirus. For example, the Federal Reserve began buying more mortgage-backed bonds to keep the market afloat and at the same time instituted a bailout for borrowers hit financially by the crisis. The uncertainty makes lenders and investors in mortgages nervous. They worry that people will lose their jobs and not make their monthly payments, or that the economy will go on lockdown again, hurting the housing market in general. Rates on home loans are really based on what investors will pay for mortgage-backed bonds. Investors need some kind of yield, or they won’t buy those bonds. That is why rates can only go so low. It’s a question of whether the bonds even exist and what the demand would be for those incredibly low-rate bonds. "For a variety of reasons, it doesn’t make any sense for the market to begin to rely on a new, lower-rate bond unless it’s sure that bond will remain relevant,” said Graham, editor of Mortgage News Daily -- “We only recently saw the introduction of an all-new bond coupon in April. It technically allows for rates to go down to 2.25% on the 30-year fixed. That’s as low as rates could go without a serious double-dip recession to drive a second wave of gains in the bond market — totally possible, but not yet a guarantee." Investors also want to be able to get the yield on the bonds they buy for a long while in order to make their investment worth it, so they don’t want people to refinance too quickly.

Source: CNBC