Bond Market Resilience Amid Economic Uncertainty

In the first full trading week of 2025, the bond market has continued to show resistance. Prices are lower, and rates are climbing. Let’s take a look at what happened and what we can expect moving forward.

“When the levee breaks, I’ll have no place to stay” When the Levee Breaks by Led Zeppelin.

Mixed Auction Results

As you know, the U.S. government runs deficits every year. To cover these shortfalls, the Treasury sells new debt—things like Treasury Bills, Notes, and Bonds. These auctions have a big impact on mortgage rates. If the auctions go well and investors are eager to buy at current interest rates, mortgage rates tend to stay lower. But if the auctions struggle, rates can rise.

This week, the 10-year Note auction didn’t go well. Buyers needed higher yields to take on the debt, pushing the 10-year yield briefly above 4.70%. That’s the highest it’s been since April. However, the next day, the 30-year Bond auction went much better, with a solid buying appetite. This helped stabilize long-term interest rates, including mortgage rates.

Looking ahead, it’s critical to monitor the government’s efforts to reduce the pace of new debt. In 2024, the U.S. had a $2 trillion deficit, which means the government borrowed a lot. As Fed Chair Powell has consistently pointed out, the trajectory of new debt is unsustainable and could eventually harm the economy.

Mixed News on Jobs

The ADP Report, which tracks private job creation, came in below expectations. However, the JOLTS report showed a larger-than-expected increase in job openings, which helped balance things out. As a result, bonds recovered from their worst levels of the week.

With the economy transitioning between administrations, many companies are taking a wait-and-see approach. They’re not hiring or firing in large numbers until they get a clearer picture of fiscal policies from Washington.

Inflation Remains a Concern

Both here and abroad, inflation is still a worry. Recent data suggests that inflation is staying sticky, and there’s even a chance it could start picking up again. This will be a key factor to watch in the months ahead. If inflation doesn’t cool down, it could keep the Fed from cutting rates as quickly as they might want to.

Oil Edging Higher

Something else to keep an eye on is oil prices. Crude oil hit a multi-month high of $75 this past week. High oil prices tend to fuel inflation, so if we want to see long-term rates stabilize, we need to see oil prices come down.

When The Levee Breaks

As Led Zeppelin’s song “When the Levee Breaks” goes, when levees break, bad things happen. Over the past three and a half months, mortgage bonds, which directly affect mortgage rates, have broken several key support levels. This has led to further price losses and rising rates.

Right now, the 10-year Note yield is approaching 4.75%, which was the peak in 2024. If this level holds as a ceiling, it could help keep rates from going much higher. Let’s hope that’s the case.

30-Year Mortgage Rates

The 30-year fixed-rate mortgage averaged 6.93% as of January 9, 2025. That’s up slightly from the previous week, when it averaged 6.91%. A year ago, it was 6.66%.

Bottom Line: Rates have been edging higher since mid-September, but they seem to be trying to stabilize as the 10-year Note tests its 2024 highs at 4.75%.

Looking Ahead

Next week, we’ll be focused on inflation data, including the Producer Price Index (PPI) and the more important Consumer Price Index (CPI). There will also be housing news and a number of Fed officials speaking about the economy and the direction of rates. All of these could move interest rates in one direction or another

Mortgage Market Guide Candlestick Chart

Mortgage bond prices determine home loan rates. The chart below is a one-year view of the Fannie Mae 30-year 6.0% coupon, where currently closed loans are being packaged. As prices move higher, rates decline, and vice versa.

If you look at the right side of the chart, you can see how prices have declined to the lowest levels since July 4th, meaning these are the highest mortgage rates since July.

You can also see the “levees” or ceilings of resistance (yellow lines) which are preventing prices from moving higher and rates moving lower.

Chart: Fannie Mae 30-Year 6.0% Coupon (Friday, January 10, 2024)

Economic Calendar for the Week of January 13 – 17