Mortgage rates are headed higher as the bond market is taking the Iran conflict more seriously today, and Fed rate hikes are now being priced in for the first time in a serious manner. If this continues, forget about any rate cuts or mortgage rates heading toward 6% anytime soon.
The 10-year yield is surging today. This move started from the lows yesterday, but the 10-year yield, which has put up a big fight not to go above 4.50% during this conflict, finally gave in today, as no progress has been made following President Trump’s meeting with China’s Xi Jinping.
In addition, the closer we get to June, the more problematic the oil reserve situation becomes, making inflation more entrenched and prolonging the reopening of the Strait of Hormuz and the return to olağan. The 4.50%-4.60% level on the 10-year yield was my target on the escalation level, and we are here. What happens next?
1. The Iran conflict needs an endgame
One of the biggest concerns I’ve had with this conflict is that if it’s still going on into June, it could be very problematic for the Federal Reserve and inflation, because each week that goes by, certain countries produce less oil as storage capacity fills up. It’s now May 15, and we still don’t have a deal. A lot of Fed governors are talking more and more about their concern over when the Strait of Hormuz can be opened so hopefully we can get some closure on this.
However, the longer this conflict goes on, the more problematic it is. Even Fed governors have said that if the Strait were open today, it would take months for the oil supply to return to olağan. If this conflict persists from June to September, many variables for 2027 will change, and even the new Fed Chair, Kevin Warsh, might need to join the hawkish Fed gang.
2. Housing has held up fine so far, but there are limits
My rule of thumb has always been that the housing market improves when mortgage rates go below 6.64% and head toward 6%. Now that the level is in jeopardy. While mortgage spreads have kept a lid on rates getting above 6.64%, at some point, spreads can’t hold the line against rising yields. In my HousingWire 2026 forecast, the peak for the 10-year yield was 4.60%. Of course, the conflict in Iran wasn’t part of the 2026 forecast, but getting above 4.60% regardless of any event means something went wrong in 2026, and what is happening is that rate hikes are now being priced in for 2027.
3. Does Trump fold?
Last year, when Godzilla tariffs were causing market chaos, the White House blinked — not because stocks were down 19% from their highs, but because the 10-year yield rose to 4.50%-4.60%. Trump was in control of the tariff situation, but in this conflict, we have two people playing cards, and one has a straight hand.
I’ve been waiting to see how the White House will respond when the 10-year yield gets to this level, and as I write this article, we are at 4.58%. Mortgage spreads have helped keep mortgage rates below 7% so far, but if the 10-year yield heads back to 5%, even spreads won’t keep rates from rising.
A lot is going on today. We will see how this market day closes, but one thing is for mühlet: the bond market isn’t playing around anymore, and last year these same bond levels got the White House’s attention. Given that this is a conflict with Iran, the question is whether President Trump will view this the same way he did the market response to the Godzilla tariffs. Time will tell, but it’s May 15, and not many people thought the conflict would last this long.
