Last week, U.S. mortgage rates recorded their largest weekly increase in eleven months, rising to their highest level since October of last year. According to data released by the Mortgage Bankers Association (MBA) on Wednesday, for the week ending March 20, the contract rate for a 30-year fixed-rate mortgage rose by 13 basis points to 6.43%. This surge was mainly driven by inflation expectations sparked by the conflict in Iran, causing the 10-year U.S. Treasury yield, which is crucial for pricing home loans, to continue its upward trend.
Market Reaction
Since the escalation of Middle Eastern conflicts at the end of February, mortgage rates have climbed 34 basis points in just three weeks. MBA data shows that due to the surge in borrowing costs, the mortgage application index fell by 10.5% last week to 310.7, hitting the lowest point since January this year. Notably, refinance loan applications, which are most sensitive to rates, plummeted by 14.6%, while home purchase loan applications recorded a 5.4% decline. Although safe-haven sentiment once boosted demand for Treasuries, the threat of inflation brought by the spike in oil prices from $75 to $100 per barrel significantly outweighed the safe-haven buying.
Macroeconomic Background
The Federal Reserve's policy outlook has undergone a profound shift. Joel Kan, Vice President and Deputy Chief Economist of the MBA, pointed out that the threat of sustained oil price increases has kept Treasury yields at high levels. The 10-year U.S. Treasury yield has risen from 3.96% before the attacks to 4.39% on Tuesday, reaching its highest closing level since July last year. Before the outbreak of the conflict, there was widespread market anticipation that the Federal Reserve would cut rates at least once this year, but the current interest rate futures market has largely ruled out any possibility of policy easing in the near term.
