Today was the worst-case scenario for interest rates.
But – at least there are some very interesting takeaways.
1. Iran’s Most Powerful Remaining Weapon Is Working.
Iran’s military is crushed, its air defenses are gone, its missiles are proving to be less effective than feared, its inflation is out of control (almost 85% this year alone), it has virtually no export income (from as high as $13 billion per month to $0), it has minimal access to funds because of banking system restrictions, it faces massive shortages and political unrest, and it is more isolated than ever on the world stage.
But – it has one remaining very powerful weapon. And most of us saw it coming: Operation High Gas Prices – Prior To the Midterms. And – it seems to be working perfectly.
Oil prices (WTI) are close to $102 per barrel – up from the $50 range in December, the $60 range in February, and from just under $70 as recently as June.
One of Iran’s proxy groups (the Houthis) is now on the warpath – no doubt with the encouragement of Iran – and they recently took over a Red Sea port that threatens oil shipments.
Oil prices shot up as a result. And Iran no doubt hopes this makes America’s allies as upset as America’s voters, as the pain is significant.
2. Why Remember October 18th, 2023? (Because We Survived It)
On that ominous day, the average mortgage rate hit 8%!
And…we all survived.
The average mortgage rate today is 7.07%! Brutal, but very likely survivable. We saw similar rates as recently as May of 2025 too.
Here is what is really interesting: The 10-Year Treasury yield on Oct 18th, 2023 was almost the same as it is today.
So – once again – thank God for the falling spread between the 10-Year and mortgage rates.
3. What Happened Today – Making It The Worst-Case Scenario?
Oil prices shot up AND PPI (wholesale) inflation came in hotter than expected. And nothing spooks the bond market more than inflation threats.
The White House is very likely in panic mode. (And so are many mortgage companies; refis? Fuhgeddaboudit…)
4. Treasury Secretary Bessent Is Desperately Trying To Bring Yields Down – And Failing.
Bambi Bessent is trying to fight Godzilla Bond Market in a variety of ways, including loosening regulations to get banks to hold more Treasuries and making large bond purchases.
And – it is not working. Obviously. Analysts like Jeff Snider and George Gammon often argue that bond purchases by the Treasury or the Fed have little impact. When rates do move down in response, they likely would have anyway, per Snider and Gammon.
The bond market is simply too huge and powerful – and it responds to growth and inflation expectations no matter what the Fed and Treasury are up to.
5. It Is NOT the Supply of Treasuries Pushing Rates Up.
Gammon also reminds us that rates hardly budged when our total debt levels increased from $8 trillion (prior to 2008) to over $40 trillion. If “supply” was a factor behind rates, per Gammon, we’d see much higher rates now with debt levels (and the supply of bonds) 5x higher.
The bond market responds to growth and inflation expectations, per Gammon, and not supply (see above).
6. Will Rates Come Down?
Yep.
When the war ends. No clue when that will happen, but it seems likely to be after the midterms.
Possibly when the Fed RAISES rates, paradoxically, as it will be seen as inflation-fighting.
If the stock market corrects and money flees into bonds. There are a lot of “Ed Dowds” out there predicting this.
If the labor market starts to show much stronger signs of weakness.
As always, though, there are so many variables (debt levels, AI’s impact, tariffs, inflation, money supply, war, China’s economy, Japan’s yen issues, deregulation, energy supplies, labor data, inflated stock values, etc.) at play – nobody knows what will happen.
