US mortgage rates near 7.5%: Why rising Treasury yields and Fed rate hike fears could push home loans towards 8%

US mortgage rates have surged to nearly 7.5% in just over a month, nearing a 3-year high. This sudden increase has made home loans more expensive for buyers. Experts predict rates could potentially reach 8% if current pressures persist. The main drivers behind this trend include ongoing inflation, economic growth, government borrowing, and global uncertainty.

The recent US attack on Iran on February 28 further fueled concerns about rising inflation. Higher oil prices from the conflict have contributed to the recent rise in borrowing costs. US Treasury Secretary Scott Bessent has acknowledged the link between borrowing costs and energy prices, stating that he expects interest rates to fall once the conflict ends.

However, he is unsure of the exact timeline for the conflict's resolution, which remains a source of uncertainty. While US economic growth has remained robust despite higher borrowing costs, consumer spending and manufacturing activity have continued to show healthy growth. Inflation remains above the Federal Reserve's target of 2%, currently sitting at 3.4%.

When the economy is strong and inflation stays above target, investors demand higher returns for holding long-term bonds, pushing yields and mortgage rates upward. The rapid expansion of artificial intelligence is also contributing to US economic growth. Technology companies are investing heavily in AI infrastructure, issuing large amounts of debt to fund these projects.

Some tech firms have credit ratings nearly as strong as the US government, making their bonds attractive to investors. However, the surge in AI spending may crowd out other investment options, making it harder for other bonds to compete for investor dollars. The US national debt has reached a record $40 trillion, a significant increase since the COVID-19 pandemic.

Higher Treasury yields also increase the government's interest costs. Concerns about rising government debt and higher interest payments can make investors less willing to buy Treasury bonds, further driving up yields and mortgage rates. While mortgage rates have eased slightly from their recent highs, the possibility of additional Fed rate hikes this year remains high.

Traders see an 86% chance of at least one 25-basis-point increase by year-end. This ongoing uncertainty means US homebuyers face the risk of even more expensive loans in the coming months, potentially pushing mortgage rates closer to the 8% mark and making homeownership more expensive for buyers.