Ever since late March, financial markets have been playing a high-stakes version of Deal or No Deal when it comes to developments in the Iran conflict. Some weeks the briefcase contained lower rates and happy investors. Other weeks? Not so much. This week had a few nail-biting moments, but by the final buzzer, everyone seemed to walk away with a prize.
Before diving in, here’s a quick refresher on the chain reaction that’s been driving markets:
- The Iran conflict pushes oil prices higher
- Higher oil prices can fuel inflation
- Higher inflation tends to push interest rates higher
- Financial markets then proceed to overreact, calm down, and overreact again
There are certainly other moving parts, but those four bullet points explain most of the drama we’ve seen lately.
The week got off to a rocky start. Mortgage rates moved higher as fighting continued over the weekend. But almost immediately, sentiment began to improve after Israel agreed to halt attacks in Lebanon.
Interestingly, bonds decided to stop following oil prices quite so closely later that day. Normally, falling oil would help rates move lower, but instead bond yields rose. The likely explanation? Investors were rotating back into stocks while also preparing for this week’s Treasury auctions. In market terms, everyone suddenly found a different shiny object to look at.
Wednesday brought another episode of Deal or No Deal when President Trump warned that the U.S. would be hitting Iran “very hard.” Markets braced for another escalation. Then, in a classic plot twist, Trump reversed course the next day—not only cancelling additional attacks, but also delivering his strongest and most convincing announcement of a potential peace agreement yet.
Markets may have learned not to take every headline at face value, but this time they were willing to believe the story. Oil prices dropped sharply, bond yields fell, and stocks rallied. The only remaining question was whether Iran would open the briefcase labeled “No Deal.”
Throughout this process, both sides have regularly disputed each other’s claims, making it difficult to know what was actually happening behind the scenes. While some news outlets published reports that cast doubt on the peace deal narrative, the skepticism felt considerably more muted than in previous weeks.
By Friday morning, there was even more encouragement. Iran’s foreign minister confirmed that both sides had never been closer to signing a memorandum that could effectively end the conflict and pave the way for formal peace negotiations.
With that, bonds managed to finish the week very close to their strongest levels. Since mortgage rates are heavily influenced by the bond market, average 30-year fixed rates fell to their lowest levels in more than a week.
The funny part? The average lender is now only 0.02% above the lowest mortgage rates seen in the past four weeks. The less funny part? That entire four-week range still happens to represent some of the highest rates we’ve seen in the last ten months. Progress is progress, but let’s not start planning a victory parade just yet.
Looking ahead, next week could bring another round of volatility—for better or worse—depending on what’s inside the next briefcase.
If a formal peace agreement is signed, rates could move even lower. If tensions flare up again, markets may find themselves revisiting recent highs faster than a contestant changing their answer after hearing the audience vote.
The other major event on the calendar arrives Wednesday with the next Federal Reserve announcement. Markets currently see virtually no chance of either a rate hike or a rate cut, which sounds boring on paper. But Fed days have a special talent for creating excitement anyway.
This time, investors will be paying close attention to comments from new Fed Chair Kevin Warsh. Even when the Fed leaves rates unchanged, a few carefully chosen words can move markets just as much as the actual decision.