Two views on what happens next with the 10-year yield and mortgage rates
The case of low prices
1. The economy can’t handle inflation from rising oil prices, rising air fares and rising diesel prices, which will have an impact on food costs – and we have a 15% tax coming soon. This shock cannot be absorbed by consumers and a weak labor market will force the Fed to lower interest rates, as many companies will need to lay off people due to low demand.
A case of high prices
2. The economy is currently spending less money on energy costs than in previous years, so it can face higher energy costs, as it did at the beginning of the last decade. With rising oil and food prices, inflation expectations will also rise, forcing the Fed to be more hawkish and raise rates more likely. Even if the Fed just talks about rate hikes it can send rates higher. Domestic balance sheets remain strong, and for now, prices and inflation should rise together.
Both theories have valid claims, but now that the conflict is escalating and we’ve had a surge in oil prices rising to 118 on Sunday, let’s see what the data and history tell us. Because as I write this article, the 10-year yield is at 4.13% and I’m still waiting to see if the 10-year yield can just close above 4.15% and get the next bond sale.
The current state of the housing market
Right now, the housing market looks good as long as mortgage rates are close to 6%. Sales are increasing and the inventory growth rate is slowing – we may have weekly prints like that year after year.
Our Housing Market Tracker over the weekend dives into all the data lines you need to understand what’s going on here. The housing market has been affected when prices have increased by more than 6.64% in the last few years. So what are the chances of higher prices due to higher oil prices?
The history of house prices and oil prices
Here is a chart of mortgage rates going back decades.
We had oil panics in the early and late 1970s, which drove prices up, but remember, the economy was booming at the time, with a booming labor force and a booming housing market. So, don’t expect 1970s inflation and mortgage rates with this current controversy.
More relevantly, we had the Gulf War oil spike in 1991 and the economic downturn at that time. We also saw an increase in oil prices in August 2008, but the economy was facing a banking crisis. Oil prices were raised in the early 2010s and inflation and rates were low at that time. Then we had the oil spike after the Russian invasion of Ukraine. Take those events with oil charts when comparing mortgage rates.
See you? However, to me, the Fed’s policy really runs the show with each episode, whether mortgage rates were below 5% in the early 2010s or nearing 18% in the early 1980s.
The conclusion
In the meantime, we have to deal with today’s economy and Federal Reserve policy, which is very different than decades ago. The Fed has done a lot of rate cutting already this cycle and mortgage spreads have almost returned to normal, keeping mortgage rates below 6.25% all year – despite all the drama. Even today, Mortgage News Daily reported loan rates at 6.17%. They credit mortgage spreads for their role in keeping rates low.
On Sunday night we saw oil prices reach $120 and send the 10-year yield up to 4.21%, but as oil prices fell, so did the 10-year yield, and it is currently at 4.13%. So we’ll be looking at this relationship in the coming weeks. As long as this conflict continues, the impact on the economy and inflation figures will continue.
At some point, the bond market will tell us that the economy is taking a hit, but right now, it doesn’t, and it doesn’t believe that this contraction will last long.
