The Federal Reserve’s decision to raise interest rates for the first time in over three years is expected to increase the financial burden on domestic borrowers in the U.S. As U.S. Treasury yields climb, their impact is rippling through domestic bond rates, putting additional upward pressure on mortgage rates that have already surpassed 7% annually.
At the Federal Open Market Committee (FOMC) meeting held on September 15-16, the Fed unanimously voted to increase its target policy rate range from 3.50-3.75% to 3.75-4.00%. This marks the first rate hike in 3 years and 2 months, with all 12 FOMC members in agreement.
The concern now is that this rate increase may not be the last. The Fed’s dot plot reveals that 16 out of 18 committee members project the policy rate to be higher than current levels by year-end, strongly suggesting the possibility of further rate hikes in the coming months.
The hawkish signals sent shockwaves through the U.S. bond market. The 10-year Treasury yield initially dipped to 4.92% following the rate announcement but rebounded past 5% after Fed Chair Kevin Warsh’s hawkish press conference. The more rate-sensitive 2-year Treasury yield surged over 7 basis points, reaching 4.74%.
This surge in U.S. interest rates is reverberating through the domestic bond market, pushing mortgage rates higher. The average yield on 5-year financial bonds (unsecured, AAA), which serve as a benchmark for fixed and mixed-rate mortgages, hit a new annual high of 4.655% on Tuesday.
In response to rising benchmark rates, the upper limit for 5-year mixed-rate mortgages at major banks like KB Kookmin, Shinhan, Hana, Woori, and NH Nonghyup has already exceeded 7% annually, with further increases likely. A banking insider noted that the Fed’s hawkish stance suggests high interest rates may persist for an extended period.
Variable-rate loan borrowers are also feeling the pinch. The Cost of Funds Index (COFIX), which guides variable-rate mortgages, reached 3.18% for new transactions in August. This is the highest level since December 2024 (3.22%), and while it has stabilized after four months of consecutive increases, it remains elevated, adding to borrowers’ financial stress.
Anticipating continued rate hikes, financial regulators are working on measures to mitigate interest rate risks for borrowers. The government recently announced plans to encourage banks to offer long-term fixed-rate mortgage products of 10 years or more, as part of its Support Plan for Vulnerable Borrowers in a Rising Interest Rate Environment.
While government-backed mortgages currently offer fixed-rate products for up to 50 years, most bank mortgages are concentrated in 5-year mixed or 5-year adjustable-rate products. These structures expose borrowers to market rate fluctuations after the initial fixed period.
Financial authorities plan to unveil detailed strategies to promote long-term fixed-rate mortgages in the banking sector later this year. With the U.S. entering another cycle of interest rate hikes, the need for borrowers to have options to lock in long-term rates and shield themselves from rising market rates has become increasingly crucial.