This is Matt Graham with the MBS Live Market Update. Last week was an eventful one for mortgage rates in the bond market, but ultimately a decent one. Monday’s mortgage rates matched the highest levels in nearly a year, but by Friday, we were actually just a hair lower versus the previous Friday Here’s how we got there. After reports of more US airstrikes in Iran, fuel prices jumped higher on Monday, as has been the case for much of July. Higher prices for oil, gas, diesel, et cetera, put upward pressure on rates via inflation implications, and that’s because rates are driven by bonds, and bonds hate inflation, all else equal. Coincidentally, Tuesday and Wednesday were set to offer two major updates on inflation via the government’s consumer and producer price indices. That’s CPI and PPI for those of you playing along at home. Fed Governor Chris Waller was speaking on the same day on Monday and added to the tension by saying the Fed would need to consider raising rates, quote, “In the near term,” if the reports came in hot. Waller’s comments represented the first major dose of forward guidance from a Fed official since Kevin Warsh took the helm. Forward guidance is just a complicated way to refer to Fed officials commenting on the likely path of Fed policy based on prevailing trends in inflation and employment. In other words, here’s what we’re gonna do with the Fed funds rate or bond buying based on what we think is probably happening in the economy. Warsh has repeatedly expressed his intent to minimize forward guidance from the Fed. As such, the candor and content of Waller’s comments had a bigger impact than they otherwise might if multiple Fed speakers had been making similar comments over the past few weeks. Simply put, it led the market to price in the highest odds of a Fed rate hike in twenty twenty-six since the week of the last Fed announcement in mid-June.
Thankfully, though, inflation reports pushed back in the other direction, and they did so very forcefully. Data’s impact on bonds is almost always driven by the gap between the median professional forecast and the actual results of the data. The key metric in Tuesday’s consumer price index fell farther below that forecast than any other CPI release in more than a year, and we rarely see a gap as big as we saw. Other components of the data were similarly below forecasts. All good news for inflation, all good news for rates. The following day, the producer price index put on a very similar display with a much bigger drop than expected. Additionally, there was also a substantial downward revision to the previous report. All told, annual PPI ended up an entire one point zero percent below the initially reported number from last month. After both of the inflation reports, the market reaction was immediately apparent, especially in terms of Fed rate hike expectations. Traders use Fed funds futures to bet directly on the level of the Fed funds rate at various points in the future. Before Tuesday’s data, traders saw the Fed funds rate just above four percent. That effectively suggested a one hundred percent chance of a rate hike by December. But after Wednesday’s PPI, that had fallen to three point eight six percent, effectively pricing out a majority of the hike that was seen by the end of twenty twenty-six. As we often discuss, when the Fed actually hikes or cuts it, it means almost nothing for longer-term rates like mortgages. After all, it’s old news by the time it actually happens if we can trade it via Fed Funds futures ahead of time. But changes in the expectations for Fed hikes or cuts do have a big impact when those changes happen. Last week was no exception. Longer-term bonds like tenure treasuries and MBS, the bonds that underlie mortgage rates, improved sharply, even if not quite as sharply as Fed Funds futures. This resulted in the average top-tier thirty-year fixed mortgage rate moving down roughly an eighth of a point between Monday and Friday, and again, ending the week just below the previous Friday’s levels. Current week, unfortunately, is off to a bumpier start following weekend news of various escalations in the Iran war. Additionally, some of the stock selling that benefited bonds on Friday has reversed course so far today. The econ calendar is very light, and the Fed will be in its blackout period, which means that in the twelve days leading up to the Fed announcement, the Fed officials abstain from commenting on policy. That removes many of the usual scheduled sources of volatility, but war-related headlines remain capable of causing fuel price shocks that of course spill over into rates. And big moves in stocks could also spill over in the bond market in either direction, i.e. a big stock sell-off could help rates again as it did on Friday, whereas a bounce could pull rates a bit higher as it has done so far this morning. That’s gonna do it for this week. Back to you
Matt Graham, Founder and CEO, MBS Live
Matt began as an originator in 2002. He fell in love with the idea of following MBS in real-time but felt that existing products were only scratching the surface. Thus was born MBS Live in 2007, the first-of-its-kind platform with real-time market data/analysis, and live chat with analysts, traders, and originators around the country. He is currently the Founder and CEO of MBS Live!
He’s been covering bond/mortgage markets, writing commentary, alerts, and chatting with the live community every business hour of every business day ever since.
Matt also serves as the Chief of Operations for mortgagenewsdaily.com, where he is one of the industry’s most respected mortgage rate experts, frequently quoted in the media. Mortgage News Daily’s rate index is used as the definitive resource on day-to-day mortgage rate averages.
He lives in the Pacific Northwest with his wife and son where he enjoys skiing, fishing, coaching youth sports, playing the guitar, and more DIY projects/hobbies than he’d care to admit.