This is Matt Graham with the MBS Live Market Update. While the milestones may be significant, the underlying reasons for them remain simple. Let’s start with what those milestones even are, even though they’re not the fun kind. Last Thursday, average thirty-year fixed mortgage rates at their highest level in just over a year. The average lender jumped over six point eight percent after being closer to six point five percent at the end of June. If we think about what’s happened since the end of June, the calculus is brutally simple. A resurgence of hostilities in the Iran war coincided with a resurgence in fuel prices, which in turn pushed rates higher due to inflation implications. As always, inflation is the enemy of the bond market. Because bonds are a fixed income investment, inflation decreases the value of their returns over time. So traders demand higher rates to offset inflation implications. There are several ways to track fuel prices, both in terms of the present-day cash value and the future value for any given month over the next few years. In the slightly bigger picture, it’s actually been gasoline futures for late twenty twenty-six that have done the best job of showing the war’s impact on bonds. And bonds, of course, directly dictate interest rate movement. What I mean by slightly longer term is something going back to roughly March at the beginning of the war. If we look at a chart of gas futures versus ten-year yields during that time, the two lines are right on top of each other and hard to distinguish if they didn’t have labels. Over shorter time horizons, such as two to five days, we can look at near-term crude oil prices, either via cash or the front-month futures contract, and those tend to correlate best with the bond market in those cases. In other words, if we look at a short-term chart with those two securities on there, the lines are also basically right on top of each other almost any time you look. If we had any doubts that inflation is a key consideration, uh, the inflation reports from two weeks ago really drive that point home. The bond rallies following CPI and PPI, that’s the Consumer and Producer Price Index, marked the only notable time this month where bond yields moved noticeably lower while oil continued higher. So the bad news is clear. Rates are higher. It’s driven by inflation, which is driven by oil prices, which is driven by the Iran war. But is there any good news? Yes, actually, depending on your definition. While it may not be much of a consolation, it’s worth remembering that rates are the highest in a year because that year has been the best stretch of good luck we’ve seen since twenty-twenty-one. In other words, if you look at a long-term chart of mortgage rates and isolate this past year, it’s the longest stretch that we have spent under current levels. Otherwise, six-point-eight-plus would just be another mid-range mark in the post-COVID era. The even better news is simply this: If rates have largely moved up due to oil prices, then they should be able to recover a meaningful amount of what was lost if oil prices find a way to move back down. Of course, that’s a big if in terms of timing, but it’s useful to know that there’s a clear path toward lower rates that depends on things that could easily happen in the near term. Case in point, the new week is already starting out on a stronger note after a pause in hostilities announced on Sunday. Going forward, it makes sense to expect rates and oil to continue this correlation, at least as long as the Iran war is going on and as long as oil prices remain elevated. In addition, the Fed announcement this week is also a potential source of volatility. Interestingly, the market has priced in nearly a forty percent chance of a Fed rate hike despite nine out of ten traders expecting the Fed to keep rates steady. In fact, I’d wager probably ten out of ten traders expect the Fed to keep rates steady. But because of the absence of forward guidance, the market is having to hedge its bets on what the Fed may actually do. It’s kind of a shoot-the-moon scenario in which the Fed might actually hike, but the market is accounting for that risk with those futures contracts. Either way, this is the biggest dislocation between Fed funds futures and market sentiment that we’ve seen in a long time, and that is always a recipe for a larger-than-normal reaction to a Fed announcement. That’s going to 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.