The conflict in Iran was arguably bad enough for loan sharks.
It sent them from their best levels since mid-2022 back into the top 6s again.
To make matters worse, we’ve received a series of hot jobs reports, including today’s BLS report beat.
But it doesn’t end there; A third threat is convexity hedging, where investors sell more Treasurys to hedge against rising bond yields.
Taken together, there are now three conditions that are putting upward pressure on mortgage rates.
Exchange Rate Threat #1: The Iran Conflict
This is probably the biggest problem right now and the reason we no longer have mortgage rates below 6% for 30 years.
We had it as recently as March 1, but then an unexpected conflict broke out and the Strait of Hormuz was closed.
Long story short, oil prices went up as a result and inflation fears were revived, just after we seemed to have passed them.
That pushed the 10-year bond yield higher, the bellwether for 30-year mortgage rates.
In the process, the 30-year fixed rate rose from about 5.875% to 6.75%, before falling slightly recently.
But there’s a good chance it could retest those levels and go even higher if conditions don’t improve soon.
And the last time I looked, there doesn’t seem to be much of a decision happening in the Middle East.
Housing Rate Threat #2: Hot Labor Market
The next issue of loan rates is hot workers. We’ve seen a series of job cuts recently, whether it’s Wednesday’s ADP report or today’s monthly jobs report for May.
The BLS said 172,000 jobs were created last month, which is more than the 80,000 expected by economists.
Simply put, the labor market has appeared strong, despite many expecting weak job numbers to continue.
We had a series of cold jobs reports late last year, but it appears that the labor market has strengthened since then.
All things being equal, this puts upward pressure on bond maturities and mortgage rates, as seen in the 10-year bond yield chart above.
Or at least it doesn’t help that the loan rates go down because of any weaknesses mentioned in that department.
If it continues, it exacerbates inflationary concerns, especially when combined with higher oil (and gas) prices.
Mortgage Rate Threat #3: Convexity Hedging
The third and final problem that mortgage rates are currently facing is something called “convexity hedging.”
It is a strategy where investors sell Treasuries when yields rise, which can increase the move higher.
So bonds are selling even more than they used to, leading to even higher bond yields.
Because bond yields and mortgage rates move in relative lock step, it puts additional pressure on interest rates.
In this process, high mortgage rates act as a barrier to refinancing, resulting in long-term mortgage-backed securities (MBS).
By selling Treasuries, these investors can reduce interest rate risk and rebalance their portfolios.
But more sales of these bonds means that yields are rising more than expected, leading to higher levels of borrowing.
To summarize, we now have three storms of mortgage costs, including war (high oil prices), hot workers (adding to inflationary pressures), and excessive selling of funds due to high bond yields.
All of this has the potential to push 30-year returns back to 7% or higher, but so far mortgage rates have taken everything a bit. It could be worse.
Before creating this site, I worked as an account manager for a real estate broker in Los Angeles. My experiences in the early 2000s inspired me to start writing about mortgages 19 years ago to help prospective (and existing) home buyers better navigate the mortgage process. Follow me on X for the hottest.
