Mortgage rates hit their highest level since June 2025 this week. Not exactly the kind of milestone anyone puts on the refrigerator, but the move was fairly gradual and, importantly, driven by some pretty logical forces.
Monday started with a modest increase, largely thanks to the usual month-end market volatility. Nothing particularly dramatic—just the market doing what markets do when they apparently have too much coffee.
Tuesday was a little more straightforward. News of new air strikes in Iran sent oil prices sharply higher and wiped out an earlier bond rally. Oil climbed to its highest levels since late July, while 10yr Treasury yields reached their highest closing levels since January 2025.
Throughout the Iran war, oil prices and interest rates have maintained a fairly close relationship, mainly because of inflation. Higher oil prices can push inflation higher, and higher inflation tends to mean higher rates. It’s not quite “oil up, rates up” every single time, but the connection has been hard to ignore.
Of course, the relationship isn’t perfect. Bonds have plenty of other things to worry about besides oil prices. Wednesday was a good example. Treasury yields briefly reached another long-term high, but then spent most of the day moving sideways in an unusually narrow range. In other words, the bond market briefly panicked, then apparently decided it had somewhere else to be.
Thursday brought a more encouraging development. Oil reached its highest levels of the week, yet bond yields remained mostly steady overnight. That was the first sign that buyers were becoming more comfortable stepping into the market and taking advantage of the better entry point created by 10yr Treasury yields above 4.80%.
Then came Fed Governor Chris Waller with another reason for optimism.
On Thursday morning, Waller said he would support keeping the Fed’s policy rate unchanged at the upcoming meeting if August inflation data—due next week—show continued progress toward the Fed’s 2% target. According to Waller, only a hotter-than-expected inflation report would push him toward supporting a rate hike.
Compared with Fed Chair Kevin Warsh’s comments at Jackson Hole the previous week, Waller’s tone was considerably more dovish. And, as you might expect, Fed Funds Futures noticed almost immediately.
But the policy outlook was only part of the story.
Waller also openly disagreed with Warsh’s reluctance to explain an explicit “reaction function”—basically, a fancy way of describing how the Fed would respond to different economic conditions.
Waller’s argument was pretty simple: investors and the public don’t need the Fed to predict the future perfectly. They just need a reasonable idea of where the Fed’s boundaries are. Think of it as knowing the strike zone rather than knowing exactly where every pitch is going.
Waller argued that Warsh was allowing “perfect” to become the enemy of “good,” and he wasn’t exactly subtle when dismissing the old “never explain” approach, adding a blunt: “good luck with that.”
That probably wasn’t the sentence you’d expect to hear from a Fed governor, but markets tend to appreciate a little candor now and then.
Waller also took a shot at Treasury Secretary Scott Bessent’s efforts to influence the bond market. Waller suggested that short-term interventions don’t accomplish much, while acknowledging that such actions remain Bessent’s prerogative.
It may sound like an extremely nerdy argument about monetary policy—and, well, it is—but investors clearly paid attention. Waller’s willingness to speak plainly mattered almost as much as the substance of what he was saying.
Friday then arrived to test the market’s newfound calm.
The jobs report showed payrolls increasing by 162,000, dramatically above the median forecast of just 56,000. Historically, the employment report has had more power than almost any other monthly economic release to cause rate volatility.
In the past, a surprise of this size would probably have sent mortgage rates noticeably higher.
This time, however, the reaction was surprisingly restrained.
Treasury yields moved higher, as expected, but not nearly as much as historical precedent would suggest. Mortgage rates also increased only modestly and remained comfortably below Wednesday’s long-term highs.
That’s not to say the jobs report didn’t matter. It absolutely did. The market reacted to it; it just didn’t react as if someone had pulled the fire alarm.
Part of the reason is that the jobs report has lost some of its traditional punch amid rapid changes in labor-force composition and ongoing seasonal distortions. The unemployment rate also remained unchanged, giving the market a more balanced picture and helping produce a reaction that looked measured rather than panicked.
The resilience in rates and the bond market on Thursday and Friday essentially means we live to fight another day.
The biggest battle coming next week will be the August inflation data, with two important reports scheduled for Thursday and Friday.
If inflation comes in lower than expected, it could strengthen the case for the Fed to keep rates unchanged. That would likely give mortgage rates some room to move lower.
On the other hand, hotter inflation could quickly bring rate-hike expectations back to life and send mortgage rates marching toward their recent highs.
And then there’s the Iran war, which remains the market’s favorite wildcard. As long as the conflict continues, oil prices—and therefore inflation and interest rates—will remain vulnerable to sudden moves.
So, after a week that delivered the highest mortgage rates in 15 months, the good news is that the market didn’t completely lose its cool.
The bad news? We get to do it all over again next week.