This is Matt Graham with the MBS Live Market Update. Mortgage rates moved sharply higher last week, ultimately reaching the highest levels since early twenty twenty-five. Most of the damage took place on Wednesday and Thursday, but Friday ultimately made things worse. The average top-tier thirty-year fixed rate rose almost a quarter of a percent in total. Oil prices, of course, remain one of the biggest problems for bonds, and they have been highly attuned to oil price movement throughout the Iran war because higher energy prices imply higher inflation And inflation is a mortal enemy of the bond market, not only because it erodes future returns in bonds, but it also has a direct impact on Fed policy. Other data and events definitely contributed to the drama, however. The Treasury Department’s bond buyback program was in the news on Wednesday again. Treasury Secretary Bessent had previously characterized buybacks as a way to, quote, “Send a signal to the bond market.” But on Wednesday morning, he took it a step farther, going so far as to say, quote, “I am the house now.” And also, he dared the market to, to quote, “Bet against me if you want.” Traders apparently replied, “Hold my beer,” or, “Challenge accepted,” or whatever snappy comeback you want to insert there. Markets reacted as soon as the buyback size was announced. We figured it would be more than four billion, since Bessent already said as much last week. But at only six billion, this apparently fell short of the market consensus. Bonds sold off immediately, pushing ten-year yields to another long-term high just under four point eight six. Of course, the selling could have had just as much to do with higher oil prices, and the market may have simply been waiting to see what the buyback announcement amount was before it decided what it was going to do for the day. Either way, things got worse on Thursday. Oil surged overnight and broke above one hundred dollars a barrel before the Producer Price Index, or PPI, was released. PPI was roughly in line with forecast, but several of the internal components suggested an unfriendly result for PCE inflation, personal consumption expenditures, and that’s the Fed’s preferred way to measure progress towards its two percent target. That distinction is important because the Fed officially targets PCE rather than CPI or PPI. Both reports contain components, though, that can help economists estimate PCE with a much higher degree of accuracy than economists can estimate the earlier inflation reports. In other words, regardless of the PPI headline numbers, we can look at internal components, extrapolate their impact on PCE, and trade that more readily than we would react to PPI headlines themselves. While ten-year yields are at their highest level since two thousand and seven, mortgage rates are still well under their twenty twenty-three highs. The outperformance is partly due to a ramp-up in GSE bond buying that we’ve talked quite a bit about, as well as some natural benefit from yield curve steepening, which basically means that shorter-term yields have done better than ten-year yields since twenty twenty-three, and mortgage rates have a bit more in common with that shorter end of the yield curve than they do with ten-year Treasuries. Last but not least, for the week, Friday’s Consumer Price Index, or CPI, created one of the more interesting reactions. The most important metric, which is the monthly core CPI reading, was just a bit hotter than expected. At first glance, that would be bad news for rates, but there was a paradoxical reaction. The CPI reading caused an immediate increase in Fed rate hike expectations. That’s the logical part. Uh, that would normally be bad for mortgage rates, but here’s the twist. Part of the present rate spike has been driven arguably by the market’s concern that the Fed has not been aggressive enough in fighting inflation. The inflation data was high enough to increase Fed rate hike odds quite a bit, but not so high as to cause some new inflation panic. As such, it sort of threaded the needle and helped longer-term rates move lower, even as the very shortest-term rates moved higher. In other words, it convinced the longer end of the bond market that the Fed would have to do more to fight inflation, and the longer end of the bond market appreciated that. Unfortunately, though, the paradox was short-lived, and a reversal in oil prices really only explains part of the reversal in bonds and rates. The rest of the explanation relies on a fairly esoteric concept of short covering. In not so many words, traders who had open bets on higher rates simply closed those positions quickly, i.e., they covered their short positions. From that point on, the bond market was free to trade as it pleased, and, uh, this is a common pattern, as short covering often produces a meaningful rally in the short term, but then tends to run out of steam unless new buyers step in. The present week’s focus is squarely on Wednesday’s Fed announcement. A quarter-point hike is baked in. Many traders are waiting to see if worse will actually pull the trigger, though. There are multiple Fed voters, of course, but it’s really the Fed chair and the board who set the tone for the meetings. As such, Wednesday afternoon is also at risk of a paradoxical movement. For instance, if a decision to hold rates steady could revive the concern that the bond market will be left to do more of the inflation fighting without sufficient help from the Fed, then the longer end of the bond market might protest the absence of a rate hike. Last but not least, and completely independent from Fed policy, war headlines and oil price volatility remain constant risks for rates, and we’ve already seen some back-and-forth volatility due to those factors this morning. But thankfully, they haven’t panned out in an excessively negative way for the bond market just yet. 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.