Why The Oil Shocks Are Pushing Rates Higher

What's Happening Today

Stocks and Bonds are both sharply lower this morning as shipping through the Strait of Hormuz has ground to a halt. Oil prices are up more than 8% today and nearly 15% since Friday, fueling concerns about inflation and pushing yields higher.

Mortgage pricing worsened early in the session, and the 10-year Treasury is now challenging the key 4.10% technical level in early trading. When Treasury yields rise, mortgage rates typically follow.

Oil Shock Rocks Global Markets

Iran has stated that the Strait of Hormuz is closed and that ships passing through could face attack. This passage is critical to global energy supply:

Over 20% of the world’s oil moves through the Strait
The channel is only 21 miles wide, with shipping lanes just 2 miles across
China receives 45% of its oil through this route
Super tanker shipping rates from the Middle East to China have jumped 50%
Atlantic rates are up 43% and Pacific routes up 45%
Insurance costs on oil tankers have surged 5x
Qatar has halted LNG production

Because oil affects transportation, manufacturing, and nearly every consumer good, rising energy prices can increase inflation fears. That is why mortgage rates are reacting negatively this morning.

Historically, once geopolitical tensions settle, oil prices and mortgage rates tend to ease. The key question is how long this disruption will last.

Is This Really an Inflation Story?

Although rates are rising alongside oil, market-based inflation expectations are not showing a major breakout.

Comparisons between Treasury yields and inflation-protected securities show very little increase in long-term inflation expectations over the past two days.

If inflation fears were truly accelerating, we would expect to see a sharper move in inflation-sensitive markets. Instead, the data suggests other factors may also be contributing to higher rates.

One possibility being discussed is increased Treasury issuance tied to military spending, which can pressure interest rates higher even without a significant jump in inflation expectations.

Housing Update: Cotality January Insights

Separate from market volatility, Cotality’s January Home Price Insights show:

National home values declined 0.1% month over month
Home prices are up 0.7% year over year, down from 0.9% previously
February home values expected to be flat
Forecast calls for 4.4% appreciation over the next 12 months

Cotality’s Chief Economist, Selma Hepp, does not expect further price declines and noted that heading into the spring buying season, the housing market appears more promising than it has in three years. She cited 3-year lows in mortgage rates, modest inventory improvement, and buyers and sellers finding more common ground on pricing.

Final Takeaway

Rising oil prices and geopolitical tensions are creating upward pressure on mortgage rates, but market-based inflation measures are not signaling a sustained inflation surge. While short-term volatility is elevated, historical patterns suggest that once tensions cool, rates often follow.

For now, we begin the day floating while watching the 4.10% level on the 10-year closely, as that will likely influence near-term mortgage rate direction.

If you want to understand how today’s market volatility impacts your purchase or refinance strategy, reach out to explore your options.