This is Matt Graham with the MBS Live Market Update. Last week, the rate market had to manage conflicting signals from Fed policy and fuel prices. As the week began, mortgage rates were already over seven percent owing to last week’s surge in fuel prices as well as the implications from the consumer and producer price indices or CPI and PPI if you prefer. The reaction was more pronounced than normal because inflation data cemented the notion of a Fed rate hike at last week’s meeting and financial markets moved to price that in immediately. This is one of the main ways that the Fed funds rate actually matters to longer-term rates like mortgages. Financial markets begin accounting for an expected Fed move well before the Fed actually makes it. And then by the time the Fed actually meets to hike, cut or hold, mortgage rates have already priced in the expected decision and are waiting for new information about what comes next. Unfortunately, the Fed delivered that new information on Wednesday, and it only added to the bond bearishness. In fact, the rate hike itself did absolutely nothing to the underlying bond market. From two PM when the hike was announced to two-thirty PM when the press conference started, bonds actually didn’t really move at all. It was only after Fed Chair Kevin Warsh began his press conference that bond yields started moving higher and fairly rapidly at that. So why did they move higher? First off, Warsh strongly implied that additional rate hikes were on the way. He described Wednesday’s hike as, quote, “removing some accommodation.” When the Fed says policy is accommodative, it means the current Fed funds rate is doing slightly more to promote economic growth and inflation than to restrain them. By saying there was only some accommodation being removed, Warsh effectively hinted at more rate hikes in the near term. Not only that, but the dot plot at two PM did the same thing. The market just took it more seriously when Warsh said it at the press conference. He also said inflation trends had not improved very plainly and the economy had strengthened and the geopolitical situation had deteriorated. One other thing that I personally appreciated being mentioned by Warsh was the fact that corporate bond issuance was also weighing on Treasury yields, pushing them higher. This has been a common theme so far in twenty twenty-six as hyperscalers and other corporates that are related to the AI build-out have added a ton of issuance to the corporate market, which tends to compete for investor capital along with Treasuries and MBS. All three of those points argue in favor of additional rate hikes. The Fed’s inflation-related concerns were only further reiterated this morning by Fed’s Goolsbee, who said that rate hikes projected on the Fed’s dot plot wouldn’t even be sufficient if inflation proves to be more driven by demand as opposed to simply supply via higher oil prices. Even now, Goolsbee noted that some of the supply-driven inflation from higher oil prices appeared to be waning and that he’s hearing more reports of demand-driven inflation heating up. The takeaway is if that continues to be proven out, then the Fed may not even be bearish or hawkish enough when it comes to interest rates. It’s that type of forward-looking concern that the market reacted to on Wednesday afternoon. But thankfully, volatility was the main symptom, and it was mostly limited to Wednesday. If anything, the market did surprisingly well, considering the Fed not only hiked but also indicated more rate hikes ahead. As we talked about last time, there have been indications that longer-term rates were actually looking for reassurance that the Fed was firmly committed to fighting inflation. In other words, things that increase the odds of a rate hike actually didn’t hurt the long end of the yield curve too much, and those rates have more in common with mortgage rates than the Fed funds rate. Wednesday’s hike and press conference more than delivered on confirming that commitment to fighting inflation. And while that did make for high volatility on Wednesday itself, rates did a fairly amazing job of returning to pre-Fed levels on Thursday, and they only rose modestly on Friday for reasons that were likely incidental. The week ahead offers very little in terms of truly big-ticket econ data, despite the calendar looking fairly busy. Oil price volatility is just as likely as anything to set the tone for day-to-day rate momentum, and we’ve seen some evidence of that this morning with lower oil prices and lower bond yields. For once, technical levels are actually worth watching. We don’t generally view technical levels as predicting the future, and that continues to be the case here. But they provide a sort of important context for the battle going on in the long end of the yield curve, with ten-year Treasury yields repeatedly finding buyers anytime they drift above five percent but still having a tough time breaking through the floor at four point nine two to four point nine four. Bottom line, when one of those levels gives way in a major way, we’ll know that momentum is shifting. 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.