This is general education, not advice. It shows what rates have done since February, three ways the next year could go, and what each would mean for 30-year mortgage rates, including VA and FHA loans. The scenario ranges are my judgment, not model outputs.
Rates
| Measure | Latest | Date |
|---|---|---|
| 10-year Treasury yield | 5.28% | October 2 |
| 2-year Treasury yield | 4.83% | October 2 |
| Federal funds target range | 3.75% to 4.00% | September 16 decision |
| 30-year fixed mortgage rate, Freddie Mac average | 7.28% | Week of October 1 |
| 30-year conventional conforming, Optimal Blue average | 7.37% | October 1 |
| 30-year FHA, Optimal Blue average | 7.10% | October 1 |
| 30-year VA, Optimal Blue average | 7.01% | October 1 |
| Headline CPI inflation, year over year | 3.4% | August |
The 10-year Treasury yield was 3.97% on February 27, the day before the war with Iran began. It has risen 1.31 percentage points since then. The 2-year rose 1.45 points, so the gap between the two narrowed from 0.59 to 0.45 points. The Freddie Mac mortgage average rose from 5.98% on February 26 to 7.28% on October 1.
Most of the rise is in the inflation-adjusted 10-year yield, which went from 1.72% to 2.92%. 10-year breakeven inflation changed little, from 2.25% to 2.36%.
Forecast
My estimated ranges for the 10-year Treasury yield at the end of each quarter, counted from October 4, 2026 (each estimate is checked against the last trading day of that quarter):
| Scenario | End of Q4 2026 | End of Q1 2027 | End of Q3 2027 |
|---|---|---|---|
| Cool-down | 4.8% to 5.0% | 4.5% to 4.8% | 4.2% to 4.6% |
| Stalemate | 5.2% to 5.7% | 5.1% to 5.8% | 5.0% to 5.8% |
| Escalation | 6.0% to 6.3% | 6.2% to 6.8% | 6.1% to 6.5% with no recession, 5.0% to 5.4% in a recession |
The grey band shows the middle 80% of historical changes in the 10-year yield over each horizon, shifted to today's 5.28% starting point. That works out to 4.7% to 5.9% by the end of Q4 2026, 4.5% to 6.1% by the end of Q1 2027 and 4.0% to 6.3% by the end of Q3 2027. It is a historical comparison, not an 80% probability forecast for the coming year.
The Q4 2026 and Q1 2027 escalation ranges are above the historical band. The Q3 2027 outcome with no recession partly overlaps it, and the recession outcome falls inside it. I treat escalation as a stress scenario.
In the historical tests shown in the appendix, the models I tried did not improve on holding the yield unchanged. I use that as a benchmark, not as proof of the scenario ranges. It is why the stalemate range is centered close to today's yield.
Mortgages
Mortgage rates generally move with the 10-year Treasury yield, but the timing and the spread vary. I assume each loan type keeps its average spread over the 10-year since February 27: about 2.0 percentage points for a 30-year conventional conforming loan, 1.8 for FHA and 1.7 for VA.
These ranges assume unchanged mortgage spreads. Wider spreads would put mortgage rates above the figures shown, and narrower spreads would put them below. As a sensitivity check, a spread 0.5 point wider would raise every mortgage figure here by 0.5 point. On October 1 all three spreads were about 0.1 point above their averages.
| Loan | Scenario | End of Q4 2026 | End of Q1 2027 | End of Q3 2027 |
|---|---|---|---|---|
| Conventional conforming | Cool-down | 6.8% to 7.0% | 6.5% to 6.8% | 6.2% to 6.6% |
| Conventional conforming | Stalemate | 7.2% to 7.7% | 7.1% to 7.8% | 7.0% to 7.8% |
| Conventional conforming | Escalation | 8.0% to 8.3% | 8.2% to 8.8% | 8.1% to 8.5% with no recession, or 7.0% to 7.4% in a recession |
| FHA | Cool-down | 6.6% to 6.8% | 6.3% to 6.6% | 6.0% to 6.4% |
| FHA | Stalemate | 7.0% to 7.5% | 6.9% to 7.6% | 6.8% to 7.6% |
| FHA | Escalation | 7.8% to 8.1% | 8.0% to 8.6% | 7.9% to 8.3% with no recession, or 6.8% to 7.2% in a recession |
| VA | Cool-down | 6.5% to 6.7% | 6.2% to 6.5% | 5.9% to 6.3% |
| VA | Stalemate | 6.9% to 7.4% | 6.8% to 7.5% | 6.7% to 7.5% |
| VA | Escalation | 7.7% to 8.0% | 7.9% to 8.5% | 7.8% to 8.2% with no recession, or 6.7% to 7.1% in a recession |
These are estimates of national average interest rates, not lender quotes or APRs. Your rate depends on your credit, loan details and discount points. The averages cover different groups of loans, so the differences between them do not show what the same borrower would be offered on each loan type.
The lowest interest rate is not necessarily the lowest total cost. FHA loans generally have upfront and annual mortgage insurance. VA loans do not require mortgage insurance, and they carry a one-time funding fee unless the borrower is exempt. Conventional loans may also require mortgage insurance.
Assumptions
| Scenario | Oil | Federal funds target, upper bound | Term premium |
|---|---|---|---|
| Cool-down | A deal holds, Hormuz traffic recovers most of the way and the Red Sea route reopens. | Holds at 4.00% through Q1 2027, then 3.50% to 3.75% by the end of Q3 2027. | Eases slowly. |
| Stalemate | Flows stay limited and the Saudi pipeline keeps recovering, with interruptions. | One or two more increases, to 4.25% to 4.50%. | Stays near today's level. |
| Escalation | Hormuz traffic falls back sharply, or the Saudi pipeline or its Red Sea terminal is hit again. | 4.50% to 4.75% by the end of Q4 2026, 5.00% to 5.25% by the end of Q1 2027. | Rises. |
The term premium is an estimate of the extra yield investors require for holding longer-term debt. The two models I checked give different estimates of how much it has risen this year, so I give it a direction here and not a number.
An earlier recession would change these estimates in any scenario, including in the first two quarters of an escalation. By the end of Q3 2027 the escalation scenario has two outcomes. Inflation pressure persists in both. They differ in whether a recession arrives. The recession outcome is not a general forecast for every recession, and the persistent inflation is why I keep it above the cool-down range.
Supply
Gross federal debt outstanding rose from $38.77 trillion on February 27 to $40.26 trillion on October 1. This total includes debt held within the federal government and is not a measure of new marketable Treasury issuance. Debt held by the public rose from $31.19 trillion to $32.43 trillion over the same dates. The gross increase is about $1.49 trillion in a little over seven months, or roughly $210 billion a month. The deficit for the first 11 months of fiscal 2026 was $1.97 trillion.
More borrowing means more Treasury debt for investors to absorb, and expectations about it can move yields before the debt is sold. I have not broken out auction sizes or net marketable borrowing, so supply is context here and not an input to the ranges.
Fed pricing
On October 2, CME FedWatch put the odds of a Fed increase at the October 28 meeting at about 17%, according to CNBC. The same report said traders still expected the Fed to raise rates in December. That is close to the Fed path in my stalemate scenario. Futures pricing is about the Fed's rate. It is not a forecast of the 10-year yield.
What would change these estimates
- Toward cool-down: the Brent spot price below $90 for several weeks, and the Red Sea route reopening.
- Toward escalation: the Brent spot price above $120 for several weeks, or a new attack on the Saudi pipeline or its terminal.
- Toward recession, in any scenario: a negative three-month average for payrolls, a four-week average of initial unemployment claims above 250,000, or the U.S. high-yield bond spread above 450 basis points. Payroll growth averaged about 51,000 a month from July through September, including September's gain of 29,000. The four-week average of claims was 200,000 for the week ending September 26, and the spread was 324 basis points on October 1.
- Scheduled data: the September CPI report on October 14 and the Fed meeting on October 28.
These thresholds are my own monitoring rules and have not been tested. I will keep these estimates on record as written and date any revision.
Sources and method
- U.S. Treasury: daily yield curve rates for the 10-year and 2-year yields, and daily real yield curve rates for the inflation-adjusted yield, through October 2, 2026.
- Mortgage rates: Freddie Mac weekly average, and Optimal Blue daily averages for conventional conforming, FHA and VA loans.
- Inflation: 10-year breakeven inflation and headline CPI.
- Risk measures: Brent spot price, high-yield bond spread and initial unemployment claims.
- Debt and deficit: Debt to the Penny and the Monthly Treasury Statement.
- Term premium: New York Fed and the Federal Reserve Board estimate.
- Loan costs: VA funding fee and closing costs.
The calculations, the model test and the change log are in the appendix. AI assisted with research, calculations, charts and editing.
METHOD, TESTS, AND CHANGE LOG: THE APPENDIX →
Disclaimer: This article is for general information and education only. It is not investment, financial, mortgage, tax or legal advice, and it is not a recommendation to buy, sell, borrow or refinance. The views and opinions are those of the editor. The ranges are estimates and can be wrong, and historical relationships may not hold in the future. StandWatch is an independent publisher, not a lender or financial advisor. Talk with a qualified professional about your own situation.