The market Is calm for now
After a crazy period with the 10-year yield, which has worsened mortgage spreads, bond yields have calmed down and are currently at 4.17% after today’s job openings report, which showed a labor market getting softer but not breaking again.
While the trade war has introduced some challenges, particularly regarding mortgage spreads, there is an opportunity to navigate this landscape effectively. Currently, mortgage spreads have increased, contributing an additional 0.15% to 0.20% to mortgage rates when considering the lower projections for 2025.
This is a common occurrence during volatile market conditions. For example, mortgage rates were around 6.82% yesterday, but they could have been approximately 6.62% — near the year-to-date lows — if we had access to the best spreads for 2025. By staying informed, we can understand the markets better.
Although the 10-year yield has remained stable, the impact on spreads is becoming apparent. The question is: Will trade deals positively influence mortgage rates?
Trade deals
The recent performance of the stock and bond markets has shown a positive response to the prospect of ongoing trade negotiations. Trade agreements can significantly alleviate potential shortages and stabilize one-time price fluctuations, much like the improvements observed in supply chains during the COVID-19 pandemic.
Nonetheless, introducing high tariffs, what I call “Godzilla tariffs,” may create a sense of urgency regarding when these shortages and price increases will materialize to get deals done.
While market sentiment has faced challenges, labor data continues to reflect resilience. In response to the current situation, the Federal Reserve has adjusted its inflation expectations in light of the tariffs and revised its unemployment rate targets. Should we successfully reach meaningful trade agreements, it could enable the Fed to prioritize measures aimed at safeguarding against a recession, such as lowering the Fed Funds rate, in alignment with President Trump’s preferences, allowing bond traders to adapt accordingly.
This outlook is contingent on the successful negotiation of these trade deals; if they do not come to fruition, we may need to monitor the impact of tariffs in the months ahead closely. Fed President Waller has expressed a desire for proactive measures, suggesting that if the labor market breaks and more jobs are lost, he would favor more aggressive rate cuts, given that the repercussions of the tariffs are anticipated to be temporary. There is speculation that he shares the perspective that these tariffs may not be a long-term fixture.
Conclusion
My forecast for the 10-year yield in 2025 was that we should be in a range of 3.80% to 4.70%, and mortgage rates should range between 7.25%- 5.75%. This year, we approached the lower end of that forecast on the 10-year yield amidst notable market volatility. If we successfully finalize trade agreements promptly, the Federal Reserve could prioritize sustaining economic growth. Conversely, suppose trade agreements are delayed, and we begin to see shortages and price escalations across various products. In that case, the Fed may be more cautious than anticipated. While this does not necessarily imply an increase in interest rates, it may indicate a shift away from a dovish approach.
Nonetheless, observing the bond market responding positively to ongoing discussions regarding trade deals is encouraging, which suggests a potentially favorable outlook for 2025..
