Beyond the Noise: Markets, Investing, and the Bigger Picture
Conversations between Josh Renfro and Max Clark of the Fox Alliance that cut through the financial headlines to focus on the market trends, economic shifts, and investment themes that truly matter.
Beyond the Noise: Markets, Investing, and the Bigger Picture
What Does the Iran War Have to Do with Your Mortgage Rates?
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Mortgage rates have steadily climbed higher even as many investors expected the Federal Reserve to begin cutting interest rates. So what's really driving borrowing costs? In this episode of Beyond the Noise, Max Clark and Josh Renfro unpack the surprising connection between global events, inflation, and the bond market. Using the recent conflict involving Iran as a case study, they explain how disruptions in energy markets can ripple through the economy, influence inflation expectations, and ultimately affect the 10-year Treasury, the benchmark that has the biggest influence on mortgage rates. Along the way, they separate fact from fiction by explaining the difference between the Federal Funds Rate and long-term Treasury yields, why those rates don't always move together, and what the Federal Reserve's latest comments may signal for borrowers, homeowners, and investors. Whether you're buying a home, watching interest rates, or simply trying to understand why headlines overseas can affect your financial life, this episode provides a practical framework for making sense of today's interest rate environment.
Welcome to Beyond the Noise
SPEAKER_00One of the questions that we have gotten from a lot of our listeners is what does the Iran war have to do with mortgage rates?
SPEAKER_01We saw the Strait of Hormuz ultimately get closed, and so we began to see oil prices skyrocket.
SPEAKER_00That has a direct impact on inflation.
SPEAKER_01If people expect inflation is going to go up, they would expect the interest rate that they are getting from that government 10-year bond to also go up.
SPEAKER_00This is why, if anybody tells you they can predict where interest rates are headed, don't listen to them. Don't believe them. One of the questions that we have gotten from a lot of our listeners is what does the Iran war have to do with mortgage rates? We've seen a bit of an interesting dynamic to start out this year for the first half of this year, and that is that mortgage rates have gone up significantly. If you look from the end of February until kind of mid-May, we saw mortgage rates increase meaningfully. They went from just below six to a little over six and a half percent by the end of May. And right now we're sitting at about 6.43% today. That correlates at the same time with an increase in the 10-year treasury. We saw
What Really Determines Mortgage Rates?
SPEAKER_00the 10-year treasury interest rates go from about uh, I guess it was like 3.95. Yeah, 3.95 to almost 4.66, something like that in mid-May. And so saw it go up by 70 basis points over that same time period. So this is a very interesting dynamic that we're seeing here, Josh. And what I think is makes it particularly interesting is that correlates with the exact same time as the Iran war kicking off. What's going on? Are the Iranians affecting our mortgage prices? Why is Iran impacting our mortgage rates? Let's jump in and start to address that question.
SPEAKER_01I think the the first thing you got to step back and ask how and what determines what the mortgage rates are at. And I think this is something a lot of people don't understand. When you look at what the mortgage rate is, the single biggest determiner of what the mortgage rate is that you're gonna receive is the government, once again, 10-year treasury, the 10-year bond, the money that we lend to the U.S. government for 10 years and they pay us an interest rate on.
SPEAKER_00I think a lot of people are gonna say, hold on a second, it's a 30-year mortgage. Why would the 10-year treasury represent that? And I think what we need to, what our listeners need to understand is that is the most closely correlated time period to when most mortgages get paid off. And that's because a lot of times people are moving. You're not staying in that house for the full 30 years. So it's generally 10 or 12 years on average that you see those mortgages get paid off.
SPEAKER_01The other reason is that so much of the mortgage market is held up by federal programs. Most banks, when they make your mortgage or a mortgage broker makes your mortgage, they don't hold on to it. They don't keep it on their books. They either sell it to the government or they ultimately sell it to a company that puts it into a mortgage-backed investment. That's right. And then people buy
Why Inflation Drives Interest Rates
SPEAKER_01it on the market and can hold and collect that interest rate along the way. So, so, anyways, the point simply is it's the 10-year government interest rate on that more on the bond that ultimately is the most direct corollary to the actual mortgage rate. Right. An interesting sidebar here is that this is not the same indicator that most closely ties to if you're a company and you're borrowing money, or even if you are an investor buying a commercial property. Right. In both of those cases, the rates that people pay are much more closely tied to the Fed funds rate, uh, which is also indirectly tied to the short-term, what's called standard overnight financing rate or sofer. And so that's the most important thing first to understand is that is what determines it. So the question is, okay, well, great. Why does is the Iranian war impacting the government 10-year bond? And this comes back to a really fundamental piece, which is one of the greatest, fundamentally the biggest driver of 10-year government bond interest rates and prices is supply and demand. But the greatest factor that impacts that is, you guessed it, inflation. Inflation is the biggest driver of that. And so as we began to see the Iran war unfold, we saw this trade of form moves ultimately get closed. The amount of oil that passed through was nothing or next to nothing. And so we began to see oil prices skyrocket. Right.
SPEAKER_00Right. Yeah, and as oil prices skyrocket, that has a direct impact on inflation. Why? I mean, well, let's let's back up and say that here in the United States, the Iran war hasn't had much of a direct impact on us, right? The oil that's coming through the supply of oil. Correct. Yes. From in terms of the money that's coming or the the oil that's coming through the Strait of Hormuz really most of it doesn't find its way back here to the United States. We're energy independent. We're actually net exporters of oil. So what ultimately impacts us is the price that we're paying for that oil. And since oil, energy is an input to everything. I mean, there's transportation costs, there's manufacturing, energy, plastics, plastics, all of that is impacted by the price of oil. And that's an input literally into everything that is manufactured and sold. Of course, that's going to drive up the prices of every
The Connection Between Inflation and Treasury Yields
SPEAKER_00basically all the goods and services that we're buying. That's right. And so when the price of oil skyrocketed, it went from effectively $60 to $65 per barrel up to $115 a barrel at one point and stayed above $100 for quite a while. Yeah, several months. And over that time period, there were hints that the war was going to get resolved.
SPEAKER_01And I think it's been resolved 30 to 40 times at this point.
SPEAKER_00It's been a lot. Um, but all that to say, that several months time period where oil was higher, that increased the expectations that inflation was going to be higher. And we've already seen that. Yeah.
SPEAKER_01We've already at this point it's not even an expectation, it's actual, it's come through in the actual numbers.
SPEAKER_00Right. The numbers are showing a tick up in inflation. And so when inflation is higher, what does that mean for bondholders?
SPEAKER_01So once again, we've talked about this before in past episodes, but if you think about the price of the amount of interest that a person is going to demand from a bond, they want to make a real return. Right. Which means they want net of inflation to have make a number higher
Why Mortgage Rates Rose Without Fed Hikes
SPEAKER_01than that. So if inflation's at 2% and they make there's a 4.5% income stream that is paid to them, they get to keep a net 2.5% in that particular situation. So if people expect inflation is going to go up, what would they also expect? They would expect the interest rate that they are getting from that government 10-year bond to also go up. And so that's what we've seen. As the expectation and then ultimately the actual inflation number has picked up, the rate that people have expected coming from the government 10-year bond has also gone up by roughly a half to 0.6%.
SPEAKER_00Right. That's why we've seen the 10-year treasury go from just under 4 to 4.6% today. Um, and that directly correlates to 30-year mortgage. Exactly. And here I I think the thing that is probably most, maybe not most confusing, but uh a confusing aspect of this is when we hear the media and the investing world talk about interest rate moves, right? They talk about, oh, is the Fed gonna raise interest rates or cut interest rates? What's that gonna look like? And when people in the investing world, economists, talking heads, talk about interest rates being cut or increased, they're specifically talking about the Fed funds rate. That's right. And that is the basically the overnight rate at which the Fed will lend money to big banks. That's right. And that is the shortest term rate, and everything else generally uh has a spread on top of that. So you tend to see the you know, the 10-year, the longer-term bonds end up seeing higher rates on top of that. So it's confusing when we think about what's going on here because we started out the year with this big expectation that interest rates were going to be cut. Yeah, there was widespread consensus that the Fed was going to be cutting interest rates. As a matter of fact, if you looked at kind of the market and what it was pricing in by the end of the year, I think it was probably 60 to 80 percent likelihood that we would see a one or a two, one or two interest rate cuts by the end of the year. There was a 0% chance that we would see an interest rate hike.
SPEAKER_01And that was backed up by the Federal Reserve's own projections. If you looked at the federal overnight market, uh the federal FMC, um, they ultimately had 12 individuals that were projecting cuts. I think there were four that were projecting that it would stay the same, and there were three that were projecting hikes for the year.
SPEAKER_00Yeah, so we have this consensus at the beginning of the year that the Fed's gonna cut rates, and so we expect mortgage rates, ten-year treasuries to come down at the same time.
SPEAKER_01Or at least at the very minimum, even if it stays put, you would expect, hey, maybe mortgage rates stay the same, but we haven't seen that happen.
SPEAKER_00The Fed hasn't raised rates this year, but the 10-year treasury has gone up. And so when we think about the 10-year treasury and mortgage rates going up, I think it's very important for our listeners to understand that there are really two key components to determining tenure treasury rates or tenure interest rates and and by uh correlation to that uh mortgage rates. Mortgage rates. Yeah. And that one has to be with has to be expectations of inflation, right? And therefore how that's going to move uh the tenure treasury throughout you know, at that time. And then secondarily would be the Fed funds changes. Sure. We've not seen any changes to the Fed funds this year, but we have seen a change in expectations for inflation. And that's really what's driven up mortgage rates and prior to that, ten-year treasury rates up to this point.
SPEAKER_01And I think that is a point where confusion is reasonable because historically the Fed funds rate and the tenure treasury tend to move more in lockstep. You know, they they tended to operate the same. But we really, in the last call it two years,
The Federal Reserve's Changing Outlook
SPEAKER_01have seen several meaningful periods where the Fed funds rate moved and the government tenure treasury did not match its movement. Right. Which ultimately comes back to this idea that we've discussed before, which is the market today is demanding that they receive a reasonable return for the risk that they're taking. Yes. Um, and that risk most tightly is associated with either one of two things. Either the risk of US government default, which, while it is still slim, is a more realistic possibility than it once was, and then secondarily, that they're being compensated above inflation. Right. Both of those things, investors are consistently now saying, I don't care what the Fed funds rate is, this is a reasonable rate of interest to receive. Exactly.
SPEAKER_00Right, right. Hey everyone, if you're enjoying the insights that we're bringing on this channel, do us a huge favor and hit the subscribe button on Apple, Spotify, wherever it is that you listen to your podcast. It takes two seconds, is completely free, and helps us continue to bring you high quality content. And so let's talk a little bit about the Fed because we going into this year, we had Jerome Powell, who was the chair of the Federal Open Markets Committee and the chair
Kevin Warsh's First Big Test
SPEAKER_00of the Fed, and he tended to have, I would say, a bit more of a hawkish tendency, right? Where he was more in favor of either keeping rates the same or increasing them. There was a very well-known beef between Jerome Powell and President. There were some butting heads between Trump and Powell. Yes. And Trump's obviously been a big proponent of cutting interest rates, and he hands picked Kevin Walsh to replace Jerome Powell. Jerome Powell, Jerome Powell's term was up in mid-May, and Kevin Walsh took over. And there was this kind of wide wide consensus that we would probably see Jerome Powell or uh Kevin Walsh step in there and start cutting interest rates.
SPEAKER_01You'd expect it. It's like if the president appoints you, you probably made some promises. The question is, what promises behind closed doors did you make to the president?
SPEAKER_00That's right. And he had his first uh press conference after their first open markets committee here a couple weeks ago. And the message we got was not quite the same. No as what I was doing. Honestly, I was pleasantly surprised.
SPEAKER_01Yeah. Because at the end of the day, being loose with monetary policy and lowering interest rates prematurely risks, letting inflation spiral out of control. And so that was the concern. It's like, hey, are you going to do what you've been told to do irrespective of the consequences?
SPEAKER_00But with inflation expectations going up and all of that. Yep. Um, because if we lower interest rates in a period where inflation's starting to take up, that has the potential to allow inflation to get even more out of control. Yeah, exactly. Right. And so if we were to look at projections for the rest of this year, we talked at the beginning of the year, or we just mentioned that at the beginning of the year, expectations for interest rate cuts were the broad consensus. The crazy thing is that is completely reversed at this point. There is now
Can Anyone Predict Interest Rates?
SPEAKER_00a, according to the market, a 0% chance that we will see interest rate cuts when the wide consensus was that we would see 60-80% chance that we would. That we would see cuts. And now it's a 0% chance, and it's an 85% chance that we see at least one cut or one hike this year. Talk about a complete 180.
The Fed's Commitment to Fighting Inflation
SPEAKER_01And on top of that, the Federal Reserve also is voicing that same consensus. Now, instead of having 12 people believe we're going to see at least one interest rate cut this year on the Fed, there is one who believes we will see it this year. There is, I believe, eight that believes we will see no change, and nine, nine individuals instead of the three we had earlier that believes we will see increases with where things are at today.
SPEAKER_00This is why if anybody tells you they can predict where interest rates are headed, don't listen to them. Don't believe them. Uh, it is it is a fool's errand. I mean, it really is. You just don't know what's going to come. But I think one of the big drivers for that has been some comments that Kevin Walsh has made. I think you had mentioned some of those to me earlier.
SPEAKER_01Yeah, so a couple of two quotes that we wanted to highlight here from Kevin Walsh. The first was which of which he said shortly after um the Fed meeting and his press conference, he said, our goal is crystal clear. Inflation back up to two back to 2%, not in the fullness of time, but over the forecast period. And then secondly, he was asked whether he would tolerate inflation above 2%. And he said, anyone who believes that the Fed would be comfortable with inflation above 2% would be disappointed. So, two things to draw attention to there. One, there is a group of individuals that have basically said the Fed is comfortable with it, with it being above 2% for a period of time. So Warsh is first saying, forget it. Yeah, that's not true. We what there's a forecast period. That period is 12 months. We want to see the inflation number back within that period as quickly as we possibly can. Right. And the second thing that has also been thrown out there is maybe the Federal Reserve will change the target. Maybe they'll say, you know, because the 2% is like it's kind of arbitrary. There was a a, I believe it's a the central bank out of Australia that specifically had come up with the 2% number. And so the Federal Reserve ultimately ended up adopting it. So the question is, okay, are you really going to stick to this arbitrary number or do you potentially increase the number? Right. And what Warsh is saying is at least under my regime, that's not going to be the case. 2% is a real number. In fact, they he said in the most recent press conference, the American people have entrusted us with price stability. And we take that duty seriously. And so that's the number we are going to be targeting. Right. So it doesn't mean they'll execute. It doesn't mean that, I mean, at the end of the day, they have limited powers. They have substantial powers, but they are one force that impacts inflation. But I honestly view this quite positively because we've had for a number of years, Bernanke and Yellen were both groups that honestly did not take the price stability situation very seriously. They were more than happy to let the economy run hot on cheap money for a period far longer than they needed to. And I really do believe Powell took things in a more positive direction. And so far, I've been impressed by both by what Warsh has said as well.
SPEAKER_00Yeah, because there was a fear with Walsh that he would come in and, you know, throw caution to the wind, irrespective of what the data is telling me, we're going to cut rates.
SPEAKER_01He'd be Trump's puppet and do whatever Trump ultimately wanted. And so far we're not
What Happens Next for Mortgage Rates?
SPEAKER_01seeing that.
SPEAKER_00Right. We're seeing a very, I think, prudent approach, which is hey, we're going to get this under control. We can't let this get back out of control. Yeah. And obviously it's early innings.
SPEAKER_01You know, at the end of the day, it the real test is going to come. If we do see inflation continue to go up, will the Fed actually act decisively and stop it early? And increase rates. By increasing rates.
SPEAKER_00I mean, all he's done at this point is we didn't cut. We didn't cut. Uh and we didn't raise. So are you going to get to the point where you can confidently increase it?
SPEAKER_01And we may not need to. If inflation does happen to come back down, maybe he doesn't have to raise rates. But that's going to be the true test is at the point where it crosses into a dangerous territory. Do you act decisively or do you let things linger? Right.
SPEAKER_00And I
The Key Takeaway for Homebuyers and Investors
SPEAKER_00think a lot of that comes back to kind of taking this full circle, back to what ultimately happens with the Iran war. Because that's been the primary driver, at least at this point, sure, this year, with inflation going back up, has been the price of oil. And that seems to be a bit of a volatile situation.
SPEAKER_01It's the unending war that's had peace so many times.
SPEAKER_00That's right. That's right. So it's gonna be interesting to see how that plays out. But I would say what we want to take away from this is the consensus has changed in terms of where interest rates are headed, at least at this point. We're unlikely to see cuts by the end of the year. Um actually pretty likely to see interest rate hikes by the end of the year, assuming nothing else changes.
SPEAKER_01Yeah, and at the end of the day, the other big takeaway from this is when you're looking at a mortgage rate and wondering, hey, where is this likely to go? The real question you should be asking is what do I think is going to happen to inflation from here? That's right. Is it gonna come down? Is it gonna go up? Because at this point, that is the most close corollary to seeing what happens with mortgage rates.
SPEAKER_00That's right. If inflation is expected to be up, expect your mortgage rates to go up. If inflation is expecting to come down, expect them to come down.
SPEAKER_01That's right.