This is Matt Graham with the MBS Live Market Update. Last week brought some truly stunning developments for the bond market and mortgage rates. The height of the drama was on Wednesday and Thursday, which correspond to the Consumer and Producer Price Indices, or CPI and PPI. These two inflation reports do more than any other to provide the first look at inflation on any given month. And while the Fed officially targets PCE inflation, it is CPI and PPI that collectively account for a big enough portion of PCE that they actually have a bigger impact on the market. It also doesn’t hurt that they come out two weeks earlier. When CPI hit on Wednesday morning, our first thought was that we wished it didn’t hit at all. Uh, there was nothing about the data that was good for rates. Not only was inflation higher than expected, it was also broad-based. For instance, core CPI, which strips out food and energy prices, rose zero point three percent. But when we look at unrounded numbers, it was actually zero point three three five, which is pretty close to rounding up to zero point four. Quite the beat, considering the forecast was for zero point two. If we annualize the point three three five out to an entire year, that’s four percent year-over-year inflation, uh, quite a bit higher than the two percent target. Supercore, which strips out goods, energy, and housing or other– in other words, core services, excluding housing Was also over 0.4% month over month. It was over 0.5 the previous month. These are very high readings and a troubling suggestion that inflation is extending beyond the impact of stuff that can be explained simply by higher fuel costs. At first glance, that looked like it might be the end of the road for the rate recovery that looked like it may have been getting underway by the end of the previous week. Yields actually did jump very sharply following CPI, and mortgage rates started the day much higher and, uh, nearly threatened to move back up to recent highs. But just over thirty minutes after the data, things got weird, very weird, and rates ultimately returned to slightly lower levels by the end of the day. Not the kind of thing you would ever expect to see after that type of CPI data, especially considering the initial market reaction. Also not the kind of thing you’d expect to see without any visible, overt, obvious justification. The strong momentum actually continued through Thursday, with rates falling, uh, eighth of a point in the mortgage space and, uh, fairly sharply in ten-year yields. It was the biggest one-day drop in mortgage rates in at least three months, and that in and of itself isn’t necessarily crazy, but it is extremely crazy when you consider PPI, the Producer Price Index, came in even higher versus expectations than CPI. To some extent, that can be explained away by the fact that, uh, PPI’s components that flow through to PCE only accounted for around zero-point zero eight, uh, so not quite a tenth of a percent of an increase in PCE, but I don’t love that explanation. I think two other things explain what happened more cleanly. The first and most important consideration was the growing concern about an AI-related pullback, including fears that trouble at companies like CoreWeave could spread to others. On one hand, a broad tech pullback can increase safe haven demand for bonds, or simply cause investors to adjust allocations in favor of bonds as they decrease exposure to a frothy AI-driven trade in stocks. On a more specific note, with certain AI corporate bond spreads exploding, especially CoreWeave’s, and CapEx outlooks declining, investors may expect less debt issuance in the AI sector. Because that issuance has been bad for bonds in twenty twenty-six, a decrease in the issuance would have the opposite effect and help yields move lower. The second key factor was just timing. Yields recently hit multi-decade highs, and investors have been waiting for a level attractive enough to start buying, much like they did when the ten-year hit five percent in twenty twenty-three. Simply put, tech jitters, for lack of a better term, gave the fence sitters in the bond market a push that they needed to get off that fence. There were limits to the paradoxical rally in the bond market, and the narrative seemed to have run its course by the end of last week. Friday offered the first hint, with rates moving higher even though the Nasdaq continued to fall. Now, this morning, bonds are selling even faster as tech stocks are showing more signs of stabilizing. The rest of the week could see continued focus on the tech space, of course, given that the economic calendar is fairly light. The most important thing to know for now is what we saw last week was a quick move that amounted basically to a, quote-unquote, bracing for impact. It was never going to be enough to prompt a wholesale change in bond market momentum in and of itself. If ten-year yields, for instance, are to surge well below five percent and sustain those gains, we’d need to see a lot more drama in the tech space. At the moment, that drama seems to be on hold. Even if it returns, the deepest benefits for bonds would be reserved for scenarios that actually impact broader econ data, preferably with the backdrop of inflation returning to target. Both of those things would take many months to confirm. Bottom line, last week was a rare confluence of factors that gave us a glimpse of potential future motivations for bonds. It also may have established an overhead technical ceiling for rates, with ten-year yields bouncing in the mid-five-point-threes and mortgage rates topping out just over seven-point-six. 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.