This week turned into the most volatile week for interest rates since late March. By Tuesday, the average mortgage lender had climbed to the highest levels we’ve seen in more than 9 months.
Then, in classic mortgage market fashion, rates spent the rest of the week walking it back like someone who sent an angry text and immediately regretted it. By Friday, rates had recovered enough to end up roughly where they were the previous Friday.
So technically, we ended the week unchanged. Emotionally? Different story.
For the most part, the financial news cycle continues to be dominated by war-related headlines. Nearly all of this week’s back-and-forth in the markets can be traced to developments tied to the war and the possibility of peace.
Tuesday’s rate spike, however, was a little different. Market volume data suggested that at least one very large holder of U.S. Treasuries was doing some very heavy selling.
Because mortgage rates are based on bonds, heavy selling matters immediately. When investors sell bonds in large amounts, bond prices fall. When bond prices fall, interest rates rise. It’s one of those annoying market mechanics that sounds boring until it starts punching mortgage rates in the face.
Mortgage rates are technically based on mortgage-backed securities, also known as MBS, not directly on U.S. Treasuries. But MBS and Treasuries usually move in the same general direction on any given day. So when Treasuries got hit by heavy selling, MBS felt the pain too. And when MBS prices dropped, mortgage rates moved higher.
As for why the big selling happened, we can’t know for sure. Based on the size and volume of the trades, it was likely a very large investment fund. But we do not know whether that fund was making a bearish bet against bonds, or simply moving money out of one part of the bond market with plans to reinvest somewhere else.
In other words, we know someone big moved the market. We do not know whether they were panicking, repositioning, or just rearranging the furniture.
Thankfully, markets got some relief on Wednesday as peace prospects appeared to improve. Oil prices dropped sharply, bond yields moved lower, and volatility started to calm down into the end of the week.
That was enough to help bonds finish the week near their best levels, which allowed mortgage rates to recover back to last Friday’s levels.
The catch? Last Friday’s levels were already the previous 9-month highs at the time. So yes, rates recovered. But let’s not throw a parade just yet.
The market will be fully closed on Monday for the Memorial Day holiday. After that, the main focus will likely remain on the Iran war peace process and whether the headlines continue to point toward peace or more uncertainty.
For now, mortgage rates have stepped back from the edge. But they are still standing uncomfortably close to it.