Return of the Fed Put?

Weekly Blog #6 

“Markets can remain irrational longer than you can remain solvent.” John Maynard Keynes

If it seems like markets are backward, sideways, and upside down these days, you’re not imagining things.

We’ve officially reentered the realm of the Fed Put—that bizarre world where bad news is interpreted as good news because it might coax the Federal Reserve into cutting rates. Markets aren’t reacting to fundamentals; they’re reacting to what they expect the Fed will do about the fundamentals. So, when inflation comes in soft or jobless claims tick up, the market doesn’t panic—it rallies. Not because the economy’s improving, but because investors believe the Fed will intervene. Powell sneezes and traders run for Kleenex.

Meanwhile, something strange is happening in the bond market. Since the beginning of April, the yield on the 10-year Treasury has surged by 40 basis points. That’s not a rounding error. That’s a full-on spike. Under normal conditions, a move like that would push mortgage rates significantly higher. But so far? Mortgage rates haven’t moved much at all. The opposite, in fact—they’ve been surprisingly stable.

Contrary to what CNBC would have you believe, mortgage rates don’t track the Fed’s short-term (fed funds) policy rate. Instead, mortgage rates are priced off the 10-year Treasury note, or the long end of the yield curve, which makes sense since the average duration of a 30-year loan today is 8–9 years. So, when Treasuries sell off, and the yield rises, mortgage rates should follow. The fact that they haven’t—yet—is worth watching.

Adding to the weirdness is the behavior of the broader market. Usually, when uncertainty rises—whether from geopolitical risk, economic slowdowns, or erratic trade policy—investors go risk-off. They sell stocks and move their money to safe-haven assets like Treasuries. That pushes Treasury prices up and yields down. But not this time. Right now, investors are selling both stocks and bonds. That means there’s no traditional flight to safety—just a broad, correlated sell-off of everything. Which explains why Treasury yields are higher despite elevated uncertainty. It’s not just bad news—it’s confusing news. And markets hate confusion.

The other puzzle is why mortgage rates haven’t followed Treasuries upward. Part of the answer lies in mortgage-backed securities (MBS). Unlike Treasuries, MBS spreads haven’t widened much, which is keeping mortgage rates from rising in tandem with the 10-year. But that may not last. If MBS investors start demanding more compensation for volatility—or if broader market conditions deteriorate—those spreads could widen, and mortgage rates would be next in line for a bump.

On the inflation front, there’s a glimmer of optimism. Since the start of the year, inflation has been trending lower. The Fed’s preferred measure—the PCE, or Personal Consumption Expenditures index—is currently sitting at 2.2%. That’s just above the Fed’s stated 2% target. Not enough to pop champagne, but enough to potentially ease off the monetary brakes.

And the Fed may be getting ready to do just that. Futures markets are pricing in about an 80% chance the Fed holds rates steady at the May meeting. But come June? There’s a decent probability of the first rate cut. Whether they follow through depends on how inflation data, job growth, and consumer spending shape up over the next few weeks. But the possibility is real—and so are the implications for long-term rates and mortgage pricing.

All of this puts mortgage professionals in a bit of a bind. Clients are reading headlines about inflation cooling and the Fed possibly cutting rates. But those headlines haven’t yet translated to cheaper mortgages. The 30-year fixed mortgage is still hovering near recent highs, and many borrowers are wondering when the break comes—or if it ever will.

What we’re seeing is a tug-of-war between competing narratives. On one hand, inflation is moderating, which supports lower rates. On the other hand, persistent economic uncertainty, sticky wage growth, and unpredictable trade policy are spooking both bond and equity markets. The result is a higher yield environment with surprisingly calm mortgage pricing—for now.

It’s also a reminder that rates don’t move in a straight line, and they don’t always behave rationally in the short term. Markets are driven by expectations—of monetary/fiscal policy, trade policy growth, inflation, and global stability. When those expectations shift, pricing adjusts—sometimes violently. That’s what we’re seeing right now: the market trying to divine which narrative to believe.

For mortgage brokers and loan officers, this environment demands proactive, judicious communication. Clients need help separating noise from signal. Just because Treasury yields spike doesn’t mean mortgage rates will immediately follow. And just because the Fed is considering a rate cut doesn’t mean borrowers should wait around hoping for a unicorn deal. The bond market is volatile, the MBS market is twitchy, and lenders are adjusting pricing cautiously.

If the Fed does cut in June, and inflation continues to cool, there’s a reasonable chance that mortgage rates will trend lower in the second half of the year. But if uncertainty persists—or if the bond market starts pricing in long-term fiscal imbalances or geopolitical risk— rates could remain elevated longer than expected. Either way, mortgage professionals should buckle up—it’s going to be a ride.

Mark Lazar, MBA
CERTIFIED FINANCIAL PLANNER™