This is Matt Graham with the MBS Live Market Update. Mortgage rates managed to end last week only moderately higher than the previous week, and it would have been worse without Wednesday’s surprisingly sharp drop in longer-term treasury yields. The cause was an announcement about a treasury buyback program, or rather an increase in the amount of certain parts of that treasury buyback program. And that was a subject that got a lot of attention last week, even though it got maybe more attention than it deserved from a bond market movement standpoint. More on that in a moment. The week began, however, with the same market mover we’ve grown accustomed to since the start of the Iran war, and that is fuel prices. Renewed threats from Iran and the seizure of a UAE tanker in the Strait of Hormuz pushed oil prices and treasury yields higher on Monday. By Tuesday morning, the ten-year yield briefly touched four point seven five, and that’s a level that’s attracted enough bond buying to help the market stabilize on several occasions. Wednesday began with news that Treasury would at least double the maximum size of certain long-term buyback operations. This is an ongoing program for Treasury where it just buys back treasuries that are currently in circulation. We’ve come to equate bond buying with quantitative easing, but that is not what this is. It’s not new money creation. It is simply trading short-term demand for long-term demand, and that can exert influence on the yield curve, thus dropping longer-term yields relative to short-term yields. You could think of it like Operation Twist back in the day. Markets totally understood this from the outset, of course, and that was plain to see in the fact that two-year Treasury yields actually moved higher on the day, whereas ten- and thirty-year yields moved lower. Mortgage-backed securities are somewhere in between because the average mortgage lasts five to ten years, give or take, and that can vary over time. But that means that a mortgage rate or the bonds underlying mortgage rates will behave more like a five- to seven-year Treasury as opposed to a thirty-year Treasury, even though a mortgage can last up to thirty years. By Thursday, that one-time adjustment in the yield curve had largely run its course. The headlines continued after Treasury Secretary Bessent discussed the program on TV, but the actual trading returned to follow oil prices. Oil jumped overnight and Treasury yields followed almost perfectly. And in addition to the ongoing correlation between oil and bond yields, we also have elevated corporate bond issuance, largely driven by hyperscalers and the AI build-out. Adding to background pressure. This is a bit of an esoteric topic, but in general, higher corporate bond issuance means higher rates, all else being equal. That can happen simply from a substitution standpoint, where investors are forced to choose between bonds on one side of the market and corporate bonds, and it can also happen due to the way that corporate bonds are issued, and you could think of that as simply as locking a mortgage rate, but for corporate bonds. In other words, the book runners that help bring these deals to market can sell treasuries as a form of locking in the rate of return for the big corporations that are issuing the bonds. But the corporate issuance story is more of a background general pressure on the bond market. The moment-to-moment movements remain largely driven by oil prices, and of course, last week, we should give some credit to movement created by the Treasury news. Case in point, by the end of the week, oil prices were even higher than they were on Tuesday, but ten-year Treasury yields remained slightly lower. So in that limited sense, Wednesday’s Treasury announcement provided a sort of reset for longer-term yields. But after that reset, yields continued higher for the same reasons they likely would have continued higher even without the Treasury news, namely oil prices and corporate bond issuance. The present week begins with more Treasury news as two officials were cited saying that Treasury could tap the Treasury general account to fund more long-term buybacks. But yet again, and as will continue to be the case, the bond market understands very well that Treasury gets its money from the same old places, and that is always going to be tax revenues, bond issuance, tariffs, and everything else that puts money into government coffers. Therefore, all else being equal, if Treasury is increasing the amount of bonds it buys, it will have to increase issuance elsewhere in the yield curve. We will get the Fed’s Jackson Hole conference comments later this week, with Warsh scheduled to speak on Friday. In addition to that, there is a smattering of semi-relevant economic data, including the PCE inflation data midweek. 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.