If you've been following the news lately, you've probably heard all of these words in the same sentence and wondered how they fit together. A war on the other side of the world, a Fed meeting, a bond market selloff, and somehow your mortgage rate goes up. What gives?
It's actually a pretty simple chain once you see it laid out, so let me walk through it one link at a time.
Link 1: The war pushes up oil prices
The conflict with Iran began in late February, and it hit the world's oil supply right where it hurts. The Strait of Hormuz (a narrow shipping lane that roughly a fifth of the world's oil passes through) was effectively shut down, and Gulf producers cut back output.
Oil went from about $60 a barrel in January to over $90 in March, and Brent crude (the global benchmark) was back above $100 in September. Here at home, gas was averaging about $4.34 a gallon this week.
Link 2: Higher oil prices push up inflation
Oil isn't just what goes in your gas tank. It's what moves every truck, ship, and plane that delivers everything you buy, so when oil goes up, the cost of almost everything follows.
That's exactly what we're seeing. Inflation (the rate at which prices go up) rose to 3.7% in September, up from 3.4% in August, and gas prices alone jumped about 9% in a single month. The Dallas Fed estimated that a prolonged closure of the Strait could add anywhere from a few tenths of a point to well over a full point to inflation this year.
Link 3: Higher inflation makes the Fed nervous
The Federal Reserve has one main job when it comes to prices, keep inflation around 2%. Its main tool is the federal funds rate (the rate banks charge each other for overnight loans), and when inflation runs too hot, the Fed raises that rate to slow down borrowing and spending.
So, in September, the Fed raised rates for the first time since 2023, bringing its benchmark rate to 3.75% to 4.00%. Fed Chair Kevin Warsh said inflation wasn't coming down fast enough, and most Fed officials are projecting at least one more increase before the end of the year.
Link 4: Treasury yields go up
Here's where a lot of people get tripped up. The Fed doesn't actually set mortgage rates. Mortgage rates follow the 10-year Treasury yield much more closely (the interest the government pays to borrow money for 10 years).
Investors who buy Treasuries want to be paid more than inflation, otherwise they're losing money. So when inflation goes up and the Fed is in hiking mode, investors demand a higher yield. On top of that, the government is borrowing more to pay for the war and an already large deficit, which means more bonds hitting the market, and more supply means the government has to offer a higher yield to attract buyers.
The result? The 10-year Treasury yield pushed above 5% in September.
Link 5: Mortgage rates follow
Mortgage rates are priced off that 10-year yield, plus a spread (the extra cushion lenders and investors need to cover risk). When the 10-year goes up, mortgage rates go up with it.
And that's exactly what happened. The 30-year fixed rate climbed for seven straight weeks and is now sitting at 7.40%, the highest since late 2023 and more than a full point higher than this time last year.
Putting it together
Here's the whole chain in one breath:
War leads to higher oil, which leads to higher inflation, which leads the Fed to raise rates, which leads to higher Treasury yields, which leads to higher mortgage rates.
The good news is that it works in reverse too! If the conflict de-escalates and oil comes down, inflation should cool off, the Fed can stop hiking, Treasury yields can ease, and mortgage rates would likely follow them lower. That's why I watch oil prices and Middle East headlines just as closely as I watch the Fed these days.
Bottom line, your mortgage rate isn't decided in a vacuum. It's the last domino in a long line, and right now the first domino is about 7,000 miles away. If you want to know how this affects your plans, or you want me to keep an eye on rates for you, reach out anytime.
Rates and market figures in this note describe the period covered and are for general information only. They are not a loan quote, a rate offer, or a rate lock. Mortgage rates change daily and vary by borrower, loan program, and day of lock.
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