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How Japan could be setting your mortgage rate

The Bank of Japan has a lot of sway over the U.S. Treasury market right now — and that means it's got big influence over the home mortgage market.

The Bank of Japan's policy decision Wednesday (overnight Tuesday New York time) could be significant enough to move global interest rates.

Mortgages are loosely tied to the 10-year Treasury yield, which has been flirting with a move above 1.70 percent for a couple of weeks. During most of August, the 10-year yield stayed in a range below 1.60 percent.

Traders say the Bank of Japan's policy decision Wednesday could help snap the U.S. 10-year to a level somewhere above 1.70 percent. On a closing basis, its recent high was 1.73 percent, and on an intra-day basis it reached the psychologically important 1.75 percent. That level is seen as a near-term target, and an extended move above that could provide enough oomph to boost home mortgage rates.

The Bank of Japan could decide on a further cut to already negative rates, or it could adjust the assets that it is buying, or it may tweak its quantitative easing program and thereby affect long-term Japanese yields. If Japanese yields rise, investors and others can move into Japanese bonds, taking pressure off U.S. bond prices, which move inversely to yields.

"Bottom line is ultimately we can't escape the fact that we are in this world together … Anything that happens abroad also affects us…It's always been the case, but we're even more sensitive, and it happens more quickly." -Diane Swonk, CEO, DS Economics

Foreign central banks have been one reason Treasury yields are so low to begin with, thanks to negative yields and low rates in Europe and Japan. The recent European Central Bank meeting helped send yields above August's low levels.

The ECB refrained from extending its current bond-buying program and did not announce new securities purchases, as expected by the markets. Since then the 10-year and 30-year yields have been aiming higher with the German bund and other global sovereigns.

The Bank of Japan could give another bump to U.S. yields if it announces that it will no longer buy long duration bonds. That would immediately boost the yields on long duration Japanese government bonds, and the ripple effect could flow through all global sovereign debt, including Treasurys.

The logic behind changing the duration is that the flat yield curve and negative rates hurt banks. A steeper curve would help the banking industry globally.

"Bottom line is ultimately we can't escape the fact that we are in this world together … Anything that happens abroad also affects us…It's always been the case, but we're even more sensitive, and it happens more quickly. It's across the board (in) the financial markets. You can see these movements are much more internationally sensitive in the U.S. than they once were," said Diane Swonk, CEO of DS Economics.

The 30-year conventional fixed rate mortgage recently crept up by an eighth of a point to about 3.5 percent, after the ECB meeting earlier in the month.