Mortgage rates are headed higher as the 10-year yield surges

Mortgage rates are headed higher as the bond market is taking the Iran conflict more seriously today and Fed rate hikes are now being priced in for the first time in a serious manner. If this continues, forget about any rate cuts or mortgage rates heading toward 6% anytime soon.

The 10-year yield is surging today. This move started from the lows yesterday, but the 10-year yield, which has put up a big fight not to go above 4.50% during this conflict, finally gave in today, as no progress has been made following President Trump’s meeting with China’s Xi Jinping.

In addition, the closer we get to June, the more problematic the oil reserve situation becomes, making inflation more entrenched and prolonging the reopening of the Strait of Hormuz and the return to normal. The 4.50%-4.60% level on the 10-year yield was my target on the escalation level, and we are here. What happens next?

1. The Iran conflict needs an end game

One of the biggest concerns I’ve had with this conflict is that if it’s still going on into June, this can be very problematic for the Federal Reserve and inflation because every week that goes by, certain countries are producing less oil as storage capacity fills up. It’s now May 15 and we still don’t have a deal. A lot of Fed governors are talking more and more about their concern over when the Strait of Hormuz can be opened so hopefully we can get some closure on this.

However, the longer this conflict goes, the more problematic it is. Even Fed governors have said that if the Strait were open today, it would take months before oil supply gets back to normal. If this conflicts is still here from June to September, a lot of variables for 2027 will change and even new Fed Chair Kevin Warsh might need to join the hawkish Fed gang.

2. Housing has held up fine so far, but there are limits

My rule of thumb has always been that the housing market improves when mortgage rates go below 6.64% and head toward 6%. Now that level is in jeopardy. While mortgage spreads have kept a lid on rates getting above 6.64%, at some point spreads can’t hold the line against rising yields. In my HousingWire 2026 forecast, the peak for the 10-year yield was 4.60%. Of course, the conflict in Iran wasn’t part of the 2026 forecast, but getting above 4.60% regardless of any event means something went wrong in 2026, and what is happening is that rate hikes are now being priced in for 2027.

3. Does Trump fold?

Last year, when Godzilla tariffs were causing market chaos, the White House blinked — not because stocks were down 19% from the highs, but because the 10-year yield got between 4.50%-4.60%. Trump was in control of the tariff situation, but in this conflict we have two people playing cards, and one has a straight hand.

I’ve been waiting to see how the White House will respond when the 10-year yield gets to this level and as I write this article, we are at 4.58%. Mortgage spreads have helped keep mortgage rates from going above 7% so far, but if the 10-year yield heads back to 5%, not even spreads can keep that from happening.

A lot is going on today. We will see how this market day closes, but one thing is for sure: the bond market isn’t playing around anymore and last year these same bond levels got the White House’s attention. Given that this is a conflict with Iran, the question is whether President Trump will look at this the same way he looked at the market response to Godzilla tariffs. Time will tell, but It’s May 15 and not a lot of people thought the conflict would last this long.