Inflation is rising, but mortgage spreads have kept rates under 7%

With headline Inflation at 3.8% today, jobs data beating estimates and the ongoing Iranian conflict — rates would be above 7% today if not for improved mortgage spreads. Unlike 2023, 2024 and 2025, when mortgage spreads were elevated versus historical norms, mortgage rates are still under 6.64%. I often use the term “hug a mortgage spread” because I don’t believe people realize how much worse mortgage rates could have been in 2025 and into this year if spreads were at that level. So let’s look at the data.

Inflation

From BLS: The Consumer Price Index for All Urban Consumers (CPI-U) increased 0.6 percent on a seasonally adjusted basis in April, after rising 0.9 percent in March, the U.S. Bureau of Labor Statistics reported today. Over the last 12 months, the all-items index increased 3.8 percent before seasonal adjustment.

Inflation was expected to be hotter in this report due to energy and food prices, but core inflation was hotter than some people expected. In fact, Fed Governor Austin Goolsebee said in an interview with Bloomberg: We have an inflation problem in this country.

Now, personally, I am not buying the shelter inflation pick-up in the CPI report on rents, and neither should anyone else because we didn’t report inflation data last year when the government was shut down, which has messed up the year-over-year averages. I believe most market participants understand this. 

However, the headline inflation increase in this report is legit, as it’s driven by energy. In any case, we are not near 2% with all the inflation reports we track, and the Iran conflict is still going on. The Federal Reserve was banking on the tariff inflation fading in 2026 to get the last 2-3 rate cuts in, but now that doesn’t look like it’s going to happen as long as the conflict continues.

Mortgage rates and spreads

I am using last week’s mortgage spread data to show today’s result. Historically, mortgage spreads have ranged from 1.60% to 1.80%. Last week, spreads closed at 1.96%, up from from 1.93% the week before.

Let’s compare today’s mortgage rates to where they would have been over the last three years, given the 10-year yield’s current level:

• If we had the worst mortgage spread levels of 2023, mortgage rates would be 7.67% today, not 6.52%.
• If we had the worst levels of 2024, mortgage rates would be 7.29% today.
• If we had the worst levels of 2025, mortgage rates would be 7.10% today.

Conclusion

The 10-year yield is currently at 4.45% and today we are testing this level for the fourth time. The reason the 10-year yield isn’t higher is that we have a lot of rate cuts in the system, and so far, the Fed hasn’t guided the market higher on the next move being a rate hike. Once again in 2026, the hero is mortgage spreads, because mortgage rates could have been closer to 8% than 6% today if the spreads didn’t improve from 2023 levels, when the spreads at the worst levels were at 3.11%.