Mortgage rates began the day at the highest levels in a month. The move up versus Friday was only moderate, but Friday’s levels were already fairly close to early Feb’s highs. Oil prices continue putting upward pressure on rates, but with several caveats. It takes quite a big move in oil to motivate enough movement in the bond market to impact mortgage rates. With this morning’s spike being the largest on record at the time, today certainly qualified. But over the course of the day, both oil and bonds reversed course, thus allowing the average lender to adjust rates back in line with Friday’s latest levels. 

Big Round Trip in Oil Prices and Bond Yields

There was no denying the spillover from oil price volatility to the bond market this morning, even if it took quite a lot of the former to move the latter. At its apex, the oil surge was the largest daily move on record at over $26/bbl (just over a 28% jump). This translated to a 10yr yield jump of almost 8bps to start the overnight session. But things were already reversing course quickly by the time European trading began.  Then, by the start of U.S. trading, 10yr yields were already back below 4.18% and continued to fall back to unchanged levels at 4.13% by 2pm ET.  The reversal almost perfectly traced the reversal in oil prices.

Market Movement Recap

08:19 AM Sharply weaker overnight with oil price spike. High yields of 4.21% in 10yr.  Now up only 4.2bps at 4.171.  MBS down just under a quarter point.

10:48 AM Off the weakest levels. MBS down an eighth and 10yr up 2.8bps at 4.157

01:55 PM MBS back to unchanged.  10yr also unchanged at 4.13

Since the outbreak of the military operation in Iran, there have been varying levels of spillover from rising oil prices to the bond market. There have been notable pockets of time where the correlation broke down, but when viewed in less granular detail, oil prices and bond yields have moved higher together over the past week. Now this morning, there’s a new mega-surge in oil (presumably due to Iran’s leadership announcement and its implications for more military escalation) and the correlation is undeniable when viewed over a short time period. Today’s first chart shows there’s no question of that short-term correlation. 

The second chart shows that the correlation is definitely not proportional (the scaling is set to the same proportions used last week in order to illustrate the size of the jump in oil).

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Oil Impact Ultimately Shunned in Favor of Jobs Report Implications

It was a super interesting day for the bond market. Yields rose to the week’s highs overnight as oil prices continued to surge. We knew we’d get at least some sort of reaction to any big beat/miss in the jobs report and today’s miss was certainly big.  At first, the reaction was logical. Bond rallied. But the paradox set in quickly and yields hit new highs by 9:30am. Fed funds futures continued arguing for a bond rally, as did lowest S&P levels since November. One could say “bonds finally came to their senses,” or “the initial selling was a quick bout of profit taking,” but no explanation would have been obvious upfront. Since 9:30am marked the shift, we’d have to go with the vague “positional considerations” and stock market safe haven excuses. Either way, with bonds ending up flat despite oil cracking $90/bbl, it was good enough.

Econ Data / Events

Average earnings mm (Feb)

0.4% vs 0.3% f’cast, 0.4% prev

Non Farm Payrolls (Feb)

-92K vs 59K f’cast, 130K prev

Participation Rate (Feb)

62.0% vs — f’cast, 62.5% prev

Retail Sales (Jan)

-0.2% vs -0.3% f’cast, 0% prev

Retail Sales Control Group MoM (Jan)

0.3% vs 0.2% f’cast, -0.1% prev

Unemployment rate mm (Feb)

4.4% vs 4.3% f’cast, 4.3% prev

Market Movement Recap

08:16 AM Additional weakness overnight amid ongoing oil surge. MBS down an eighth and 10yr up almost 3bps at 4.164

08:35 AM post payrolls, 10yr yields down 1.5bps at 4.121 and MBS up 2 ticks (.06). 

10:09 AM Big reversal into weaker territory. MBS down 6 ticks (.19) and 10yr up 4bps at 4.176

11:59 AM Nice recovery with MBS down only 1 tick (.03) and 10yr down 0.3bps at 4.133

02:03 PM Best levels of the day. MBS up 2 ticks (.06) and 10yr down 2.3bps at 4.113

03:21 PM Off the best levels now with MBS down 2 ticks (.06) on the day and just over an eighth from the highs.  10yr roughly unchanged at 4.138

Before this morning’s jobs report was released, mortgage rates were on track to end the week at their highest levels in several weeks. This was due to an ongoing mega-spike in oil prices spilling over to the bond market (higher oil = higher inflation implications, and bonds hate inflation). The jobs report saved the day, albeit in a morbid way. It was one of the weakest jobs reports in years with unemployment continuing to trend higher and the job count falling deeply into negative territory. The jobs market is the only thing as important to bonds as inflation, and job market weakness tends to push rates lower. Bonds recovered back to levels that were right in line with yesterday, thus allowing most mortgage lenders to adjust their rate offerings accordingly.