This is Matt Graham with the MBS Live Market Update. Bonds had a very rough week last week, with Friday being particularly bad. Virtually all of the upward pressure in rates over the last two and a half months is a factor of the Iran war, with higher oil prices putting upward pressure on inflation. As always, bonds hate inflation because they are fixed income investments. Inflation makes those fixed payments less valuable over time, thus prompting investors to demand higher yields, all else being equal. The damage is definitely more than theoretical. The BLS, Bureau of Labor Statistics, released both of the more timely monthly inflation reports last week, with the Consumer Price Index hitting its highest levels since twenty twenty-three at the headline level, and even core inflation, which removes the more volatile food and energy prices, tied for its worst month since twenty twenty-three. The Producer Price Index was out the following day. That measures wholesale inflation at the producer level. It was even worse, with both headline and core easily hitting the highest levels since twenty twenty-two at six point zero and five point two respectively. When talking about consumer inflation at four percent and producer inflation at six percent, it’s worth remembering that the Fed’s target is two percent. As such, Fed rate expectations have rapidly shifted in favor of the next change being a hike in early twenty twenty-seven. As alarming as the data may seem, it continues to be of secondary importance to the market. The primary focus, of course, is on the evolution of the Iran war. Every headline seems to generate volatility, and each additional week without meaningful de-escalation serves to push oil prices and bond yields higher. Friday’s sharp selling followed news that no meaningful peace progress came out of Trump and Xi’s meeting in China. More than a few market participants were unfortunately expecting some sort of pivot in diplomacy following the summit, given Iran’s ties with China, but it quickly became clear that the war was not a primary topic of that summit, as we warned. By the end of Friday, ten-year yields had cracked four point six percent, which is the highest level in more than a year. Mortgage rates, however, were only, quote-unquote, only back to August’s levels, and that’s thanks to the ramp-up in Fannie and Freddie MBS purchases. Those have been compressing spreads between mortgage rates and Treasuries. Looking ahead, the market will remain sensitive to war-related developments. We’re already seeing that this morning with a series of three different groups of newswires creating two-way volatility in the market that initially helped yields make some gains this morning. But then when the third set of newswires pushed back against the earlier newswires, bonds completely erased those gains and are now back in line with Friday’s weaker levels. This is very much a case where things are bad until they’re not. In other words, we could precipitously get some announcement that effectively ends the war or points decidedly in that direction, and the market is likely to react quickly in that scenario with oil prices dropping and bond yields dropping. But there is no way to know exactly when that’s going to happen or how it will play out, whether there will be some back and forth in that process, et cetera. In terms of econ data, the upcoming week is lighter than the previous week with no true big-ticket reports. We do get the FOMC minutes on Wednesday. As a reminder, the minutes refer to a more detailed account of the meeting that has already taken place three weeks ago. Sometimes those are a market mover, but, uh, usually they’re telling the market things it already knows. In this case, there are so many Fed speakers making the rounds, letting us know what they’re thinking, that it would be hard-pressed for the minutes to deliver any meaningful surprises. 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.