- The 10-year Treasury yield remains high due in part to hedge fund strategies like the basis trade.
- Mortgage rates tracked near 8% in late 2023, despite cooling inflation, due to volatility in bond markets.
- Foreign investors pulling out of U.S. Treasurys in 2023 contributed to a sharp rise in yields.
- Basis trade’s use of borrowed money in Q3 2023 surged to over $550 billion, distorting natural bond market pricing.
- In Las Vegas, low housing inventory has helped home values stay resilient despite high borrowing costs.
If you’ve been tracking inflation numbers and expecting mortgage rates to finally drop — you’re not alone. Many Las Vegas homebuyers and real estate investors are surprised to find borrowing costs still hovering near multi-decade highs, despite signs that the broader economy is stabilizing. What’s keeping rates high has more to do with financial engineering and global bond markets than most realize, with the 10-year Treasury yield, hedge fund strategies like the basis trade, and capital flows playing central roles. Let’s look at why mortgage rates remain so stubbornly high — and what it all means for the Las Vegas real estate market.
Mortgage Rates and the 10-Year Treasury Yield: How They’re Connected
Mortgage rates, especially 30-year fixed rates, tend to move in tandem with the 10-year U.S. Treasury yield — a benchmark viewed as a proxy for long-term borrowing costs. So why the close relationship?
Essentially, mortgage-backed securities (MBS), which banks and lenders bundle and sell, are competing for investor dollars. To make these MBS appealing, mortgage rates must offer yields attractive enough to compete with low-risk U.S. Treasurys. When the yield on 10-year Treasury bonds rises, mortgage rates must also rise to remain competitive.
The typical “spread” between the 10-year Treasury yield and the 30-year fixed mortgage rate is about 1.75% to 2%. For example, if Treasurys are yielding 4%, mortgage rates are generally expected to land somewhere around 6%. However, in 2023 and early 2024, that spread has widened unnaturally as market uncertainty and risk aversion grew, even as inflation declined.
This decoupling between inflation and mortgage rates confuses many. If inflation is cooling, shouldn’t borrowing become cheaper? The answer lies in the complex mechanics of the bond market and institutional trading strategies like the basis trade — which distort natural market functions.
What Is the Basis Trade, and Why Does It Matter?
The “basis trade” is a high-stakes strategy used mostly by hedge funds and large institutional investors. It uses the small differences — or “basis” — between the price of a physical U.S. Treasury security and its matching futures contract.
Here’s how it works:
- Hedge funds borrow large amounts of money at low interest rates, often through what’s known as margin or repo markets.
- With that borrowed capital, they buy U.S. Treasury bonds outright.
- At the same time, they sell Treasury futures contracts. This helps them protect against interest rate risk.
In theory, the price difference between the physical bond and the futures contract should get smaller over time. This gives them a profit when they close their positions.
What’s the catch? The trade only works well if volatility stays low and if there is enough money moving through both the bond and futures markets. As more hedge funds get into this strategy using borrowed money, any shock — like unexpected rate moves or lack of available funds — can force traders to close their positions all at once. That sends bond prices down and yields up quickly.
The Office of Financial Research reported that in Q3 2023, the basis trade reached over $554 billion in exposure from borrowed money. This is nearly the same scale as events before the 2019 repo crisis and even the 2008 financial crash.
“Widespread use of borrowed money in Treasury markets by hedge funds — helped by borrowing through margin — increases systemic risks to financial stability.”
— Office of Financial Research, 2023
This is why today’s high 10-year Treasury yield isn’t just a simple product of basic economic factors. It’s heavily affected by speculative strategies that twist the cost of government borrowing — and by extension, mortgage rates.
When Bond Buyers Vanish: The Shock of August 2023
The turbulence in U.S. bond markets intensified further in August 2023 when foreign investment in U.S. Treasurys began to decline significantly. Central banks and sovereign wealth funds in China and Japan, two of the largest holders of U.S. debt, began unwinding positions for geopolitical and economic reasons.
Why does this matter? U.S. Treasurys rely on consistent global demand. When foreign buyers vanish, the government must offer bonds with higher yields to attract new investors.
In this sell-off, the 10-year Treasury yield surged above 4.8% — a significant jump considering that just two years prior, it hovered below 2%. That spike reverberated through the housing market.
By October 2023, Freddie Mac reported that national average 30-year fixed mortgage rates had risen to nearly 8%, a stark contrast to the sub-3% rates during the 2021 pandemic housing boom.
This kind of volatility is not just academic — it directly affects borrowers. A jump from 5% to 8% in mortgage rates increases a monthly payment on a $400,000 loan from roughly $2,147 to over $2,935 — nearly $800 more per month.
The Market’s Reaction: Fear Over Fundamentals
In real estate, confidence is key. When rates climb this steeply, buyers become hesitant, fearing further increases. Sellers get nervous seeing less traffic. Lenders wield stricter underwriting policies as affordability wanes.
By Q4 2023, this fear began to freeze real estate activity across the country, including in fast-moving markets like Las Vegas. Homes lingered longer on the MLS. Buyers asked for concessions. And deals began to fall out of escrow at higher rates.
The consequence was clear: even sellers holding properties in desirable neighborhoods had to adjust expectations quickly.
Price Cuts Become the Norm in Las Vegas
As mortgage rates rose, affordability dipped, pushing buyers out of conventional price ranges. To remain competitive, sellers had to cut prices.
Over 37% of U.S. listings had at least one price drop. Las Vegas mirrored — and in some cases exceeded — this trend. Sellers used tools like rate buydowns and closing cost credits to entice buyers to make offers.
This shift favored buyers with strong financials, particularly those purchasing in cash or using creative financing structures.
How Hedge Fund Borrowing Clouds the Housing Picture
For everyday buyers and sellers, hearing that hedge funds trading Treasury futures are responsible for wild swings in mortgage rates is understandably frustrating.
Using borrowed money makes both gains and losses bigger. In the case of the basis trade, hedge funds borrowing at 10x or 20x can cause major problems: a small price move becomes a big loss, forcing them to sell positions quickly. This sends bonds and yields into chaos.
For regular households, that means a mortgage rate driven not by inflation or economic growth — but by computer trades thousands of miles away.
This helps explain the disconnect many feel: “Inflation is getting better — why aren’t rates coming down?” The real story is financial engineering — not basic economic factors.
The Fed’s Role: Intervention or Wait-and-See?
The Federal Reserve, after raising interest rates quickly through much of 2022 and 2023, has held steady in recent months. Chair Jerome Powell has signaled that decisions for 2024 will depend on incoming data — with hopes that inflation’s downward trend continues.
However, the Fed doesn’t directly control mortgage rates. Its main influence is the federal funds rate, which affects short-term borrowing. Long-term rates, like mortgages, react more to what people expect about inflation, economic growth, and — more and more — how the Treasury market is behaving.
There’s been talk about the Fed helping provide stability by regulating the basis trade, changing the Supplementary amount of borrowed money allowed, or bringing back bond-buying programs. But such actions are politically sensitive and probably won’t happen unless a crisis occurs.
For now, the Fed seems to be waiting to see what happens. Whether or not that changes in mid to late 2024 depends on both inflation progress and overall financial stability.
What’s Happening in Las Vegas Specifically?
Las Vegas, as a market, often feels extremes more sharply than other metros. Its economy — driven by tourism, gaming, and migration — creates distinct housing cycles.
Despite rising mortgage rates, one key factor has prevented a major price collapse: inventory.
Las Vegas remains a low-supply market. Builders slowed construction in recent years due to supply chain issues and permit delays. Available homes for sale are still well below historical averages.
This scarcity has prevented home values from crashing, even as borrowing became more expensive. Investors with cash are using this window to scoop up well-located properties, particularly in Summerlin, Henderson, and around the 215 Beltway.
Cash buyers and strong-credit investors are the ones driving demand, often focused more on long-term gains than near-term affordability.
Smart Real Estate Moves for Buyers and Investors
Handling high mortgage rates takes strategy. For those looking to buy property in Las Vegas today, consider these moves:
- Look for renovations: Properties needing cosmetic upgrades or light work often have less competition and good upside potential.
- Get creative with financing: Some sellers are open to carrying debt or letting buyers take over their existing mortgages at lower rates.
- Run conservative numbers: Plan for slower price increases and higher holding costs. It’s better to be surprised on the upside than blindsided.
Tips for Sellers Facing a Rate-Challenged Market
Selling amid 7%+ mortgage rates isn’t impossible — but it requires sharper tactics:
- Price for today’s buyer: Overpricing leads to stale listings. Use local comps, not wishful thinking.
- Offer incentives: Temporary rate buydowns (e.g., 2-1 buydowns) can make your listing more attractive without dropping price.
- Stage for success: With fewer buyers in play, you need every advantage to secure attention. Invest in staging and high-quality photography.
What Could Bring Mortgage Relief?
So when can we expect mortgage rates to drop?
Several things could help:
- Renewed demand for Treasurys: If inflation fears fade and foreign investors return to U.S. debt markets, yields would naturally fall.
- Fed rate cuts: While not guaranteed, even hints of lower rates from the Fed can influence long-term rates downward.
- Less basis trade exposure: A pullback in hedge fund use of borrowed money could make the bond market less volatile. This would make the difference between MBS and Treasurys smaller.
Even a small drop in the 10-year yield could bring mortgage rates back into the 6% range — enough to meaningfully create new demand.
Right Now in Las Vegas Real Estate
Keep your eye on these active trends around the Valley:
- Builders offering rate buydown incentives, especially on homes in the $400K–$600K range.
- Investors looking at older homes (1980s–90s) near UNLV and the Downtown Arts District for rental income.
- Multifamily deals in central Las Vegas seeing interest from cash-heavy investors seeking 7–9% cap rates.
To handle this complex market, having an informed, laser-focused real estate partner is key.
For personalized insights, contact Steve Hawks today. Whether buying, selling, or investing, he provides the data-driven guidance needed in a market shaped by mortgage rates, global capital flows, and fast-changing investor strategies.
References
- Office of Financial Research. (2023). Hedge Fund Borrowing in Treasury Markets Stokes Systemic Risk Concerns. Retrieved from https://www.financialresearch.gov