Middle East Crisis Triggers Volatility in US Bond Market, Mortgage Rates Climb
The ongoing crisis in the Middle East is now sending significant ripples through global financial markets, with a pronounced impact emerging in the United States bond market. This week, the average rate on a long-term mortgage in the US moved higher as bond market volatility persisted, driven by escalating geopolitical tensions and their economic repercussions.
Mortgage Rates Rise Amid Bond Market Turmoil
According to mortgage buyer Freddie Mac, the benchmark 30-year fixed mortgage rate increased to 6.11% this week, up from 6% a week earlier. A year ago, the average rate stood at 6.65%. This latest uptick places the average rate roughly where it was five weeks ago, following a recent decline to its lowest point in three and a half years just two weeks prior. Throughout the year, rates have largely hovered around the 6% mark, providing a relatively supportive backdrop for prospective homebuyers as the spring homebuying season commences.
Borrowing costs also climbed for shorter-term loans. The average rate on a 15-year fixed mortgage, commonly used by homeowners refinancing their loans, rose to 5.5% from 5.43% last week. At the same time last year, the average rate was 5.8%, as reported by Freddie Mac.
Factors Shaping Mortgage Rates and Economic Signals
Mortgage rates are influenced by several key factors, including interest-rate decisions by the Federal Reserve and bond investors' expectations about the economy and inflation. Typically, they follow movements in the 10-year US Treasury yield, which lenders use as a crucial benchmark when pricing home loans. By midday Thursday, the 10-year Treasury yield reached 4.25%, compared with about 4.13% a week earlier.
Treasury yields have risen recently as higher oil prices, fueled by Middle East conflicts, have intensified concerns about inflation. These worries have overshadowed the impact of last month's weaker-than-expected hiring data from US employers and a relatively steady reading on consumer inflation recorded before the outbreak of the Iran war.
Hannah Jones, senior economist research analyst at Realtor.com, noted in an email: "Under normal circumstances, these soft economic readings would put downward pressure on mortgage rates, however, the news out of the Middle East is overriding those signals." Rising oil prices can push inflation higher, potentially discouraging the Federal Reserve from lowering interest rates. While the central bank does not directly set mortgage rates, its decisions on short-term borrowing costs are closely monitored by bond investors and can influence the yield on 10-year Treasury notes that help determine mortgage rates.
US Housing Market Slowdown and Future Outlook
The US housing market continues to face a slowdown that dates back to 2022, when mortgage rates began climbing from the lows seen during the pandemic. Sales of previously owned homes in the United States have hovered near an annual pace of around 4 million since 2023, significantly below the roughly 5.2 million annual pace that has historically been typical. Transactions fell to a 30-year low last year and have remained subdued so far this year, trailing the pace recorded a year earlier in both January and February despite mortgage rates being lower than they were at that time.
As geopolitical tensions in the Middle East persist, the interplay between bond markets, inflation, and Federal Reserve policies will likely continue to shape mortgage rates and the broader housing landscape in the coming months.
