Mortgage rates had their best day of the month so far with the top tier 30yr fixed rate falling 0.08% for the average lender to the lowest levels in exactly 4 weeks. Today’s improvement is a bit bigger than today’s bond market movement would suggest. The discrepancy is due to timing. Bonds were improving fairly steadily since yesterday morning and the average lender didn’t adjust yesterday’s rates in response to the bond market improvement in the last few hours of the day. As such, that improvement was tacked on to today’s. As for the drivers of the market movement, it’s the same old story since the beginning of March. The Iran war is the primary source of motivation and oil prices are frequently the best correlated indicator for bond yields and interest rates. Around 10am this morning, oil dropped and bonds improved after a senior administration official said “a lot is happening today and tomorrow. We have all the ingredients of a deal, but it’s not all there yet.”

Bonds were fairly flat overnight and haven’t moved much so far in the domestic session. More importantly, until 7am, bonds were slightly weaker even as oil prices have fallen and stocks have rallied.  What gives?! If PPI had come in much higher than expected, it would be easier to explain. But despite the 0.1 vs 0.5 reading for core monthly numbers, the PPI components that track with the more important PCE inflation metrics were actually a bit higher. In addition, the ill effects of fuel prices have already wreaked havoc on March inflation data. If we assume (and we should) that the full effects of higher fuel prices were not yet reflected in March prices at the time of the PPI data collection, bonds have to continue treading cautiously over the inflation outlook in coming months. Away from the data and war headlines, there are other considerations ranging from new estimates of the cost to fund the war and new warnings about forced selling of leveraged bond holdings if rates start rising again.

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Weekend Selling Reverses After Another Round of De-Escalation Headlines

Another day, another chance to sort through a barrage of war-related headlines to see which ones mattered to the bond market. In today’s case, there were two distinct contenders. The first was apparently bogus. It referred to Iran considering abandoning its enrichment program and it actually caused a visible surge in volume and volatility. The second contender was a batch of headlines around 12:30ET that generally spoke to de-escalation potential and negotiation possibilities. All told, it was enough to reverse the overnight weakness seen after negotiations were allegedly abandoned.

Econ Data / Events

Existing home sales (Mar)

3.98M vs 4.06M f’cast, 4.09M prev

Market Movement Recap

09:23 AM Slightly weaker at the open, but mostly recovered now. MBS down 1 tick (.03) and 10yr down 1bp at 4.325

01:26 PM Best levels. MBS up an eighth and 10yr down 1bp at 4.305

03:36 PM Holding near best levels with MBS up 5 ticks (.16) and 10yr down 1.8bps at 4.297

The setback pared a weekly gain for US government bonds sparked by an April 8 ceasefire agreement, which caused oil prices to tumble from near multiyear highs.

Economists surveyed by Wolters Kluwer are scaling back rate cut expectations as Iran conflict-driven energy costs push inflation higher, complicating the Fed’s path forward.