Well, it looks like mortgage rates will continue to avoid the dreaded 7-handle.
This time, thanks to a taco.
Ultimately, the core driver of mortgage rates right now is the conflict with Iran.
Any ratcheting up, and mortgage rates rise. Things cool, so do mortgage rates.
So when there’s a taco, things tend to improve, but how long will the strategy work?
Another TACO Helps Mortgage Rates Move Lower
Now when you hear the word taco, you’re probably thinking of a delicious Mexican treat filled with meat, cheese, maybe lettuce (!).
But that’s not the taco in question. Instead, it’s a cheeky acronym for a certain President who “always chickens out.”
I’m not here to get political. I’m here to explain this phenomenon and how it drives mortgage rates.
As noted, their primary driver right now is the Iranian conflict and how that affects oil prices thanks to key waterways involved like the Strait of Hormuz.
When things appear to be getting worse, whether it’s a new bombing campaign or other escalation, bond yields surge higher.
That takes 30-year fixed mortgage rates up with them as inflation fears grow larger.
Conversely, if you hear news of a ceasefire, negotiation, or possible “peace deal,” yields tend to drop and mortgage rates get relief as well.
The latest news out of the Middle East is that President Trump has called off new strikes, which reportedly would have been the largest since World War II.
Trump also added that Iran had agreed to an “immediate, complete, and total opening” of the Strait, and that negotiations will begin today.
Of course, Iran refuted the news, saying it was merely speaking with Oman.
Regardless, the market liked the story, as it has in the past when there were similar TACOs.
Stocks are up quite a bit today and the bellwether 10-year bond yield is down over six basis points to around 4.68%.
It had hit a fresh 52-week high last week, threatening the same for mortgage rates if things didn’t change in a hurry.
Can the TACO Effect Keep Working Time After Time?
Now here’s the issue. While the TACO effect seems to be a positive for both the stock market and mortgage rates, you wonder how many times it’ll work.
Over time, investors might grow tired of the same old act of making a big threat, then pulling back at the 11th hour.
It becomes a sort of the boy who cried wolf situation, where nobody believes you anymore, whether it’s new strikes or new negotiations.
At a certain point, the market stops believing you and demands actual results.
This is not the first TACO, and probably won’t be the last.
The back and forth act is getting tiresome and might not be as impactful each time it takes place.
Ultimately, we need an actual solution and end to this conflict so oil can flow freely, prices can come back down, and inflation can get back on course.
Mortgage Rates Have Quietly Climbed Back Near 7%
If we keep seeing empty threats, then supposed negotiations, with no fruit to bear, interest rates might keep climbing higher.
Remember, the 30-year fixed mortgage was sub-6% prior to the war in early March. The best levels since the summer of 2022, the same year the 30-year fixed was in the 3s.
Now it’s closer to 6.625% and went as high as 6.875% last week.
So the conflict has already wreaked havoc on the housing market and the damage is done.
It could get even worse and we might see a 7-handle if a resolution isn’t reached, as the Fed will likely raise its own federal funds rate in the meantime.
But if this strange negotiating style finally pays off, mortgage rates will certainly benefit and could move back toward those nice levels seen before the war.
(photo: onnola)
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