Markets are starting to price in escalation with Iran, but not fully yet 

One of the odd things about Monday’s bond action and oil prices is that I didn’t believe the markets were taking the Iran situation seriously yet, given other data lines. Oil prices rose on Monday, but not to levels that I would consider escalation fears, nor did the 10-year yield, which closed at 4.05%.

This morning as I am writing this, WTI crude is near $76 and the 10-year yield is at 4.09%. I still don’t believe the 10-year yield is fully reflecting the escalation story, but markets are starting to give the event more weight.

Today’s action with oil and bonds makes more sense to me given the recent PPI inflation data, jobless claims and the Prices Paid ISM data. I encourage everyone to listen to today’s HousingWire podcast episode, which was recorded yesterday, as this was my theme about the current situation.

Mortgage rates and bonds 

Markets can get very wild with an X factor because people just don’t know what is going on yet, so this week was going to be bumpy if escalation continued, and that is what we are seeing today. Unlike the bombing of Iran nuclear facilities last year, which was one-and-done and ended quickly, the extent of this Iran event is still up in the air. 

But, it’s not just the situation in Iran; the recent PPI inflation report was hot, the Prices Paid in the ISM data yesterday were hot and jobless claims data last week was fine. The 10-year yield as I am writing this is at 4.09%, so that still isn’t pricing in the full escalation of the war, but it’s starting to take this situation a bit more seriously.

Conclusion

By Friday, this entire conversation might change if we get more clarity on Iran or if both countries return to the negotiating table. One good thing for the mortgage market is that mortgage spreads under 2% have helped with mortgage pricing this year. In January when Trump announced Fannie and Freddie would buy $200 billion in mortgage backed securities, my main takeaway was that it was a defensive play, and so far that defensive play has kept mortgage rates closer to 6% than 7%.

Buckle up: this week will be crazy and we have jobs coming on Friday.

For me personally, I will believe the bond market is taking this more seriously when the 10-year yield closes above 4.15% and gets follow through bond market selling after that. Until then, I’m not 100% convinced that the escalation has been priced in, so there is more upside to yields than what we have seen so far.