Treasury yields and mortgage rates fell on fears of broader economic disruptions due to recent conflict in the Middle East. Federal Reserve officials also signaled the end of rate hikes, adding to expectations of global economic disruptions. All that, plus the potential for higher oil prices pushed investors toward the safety of Treasury bonds and mortgage backed securities.

Despite data confirming an uptick in economic activity and higher inflation last month, medium to longer term yields – which mortgage rates tend to follow –  fell this week. But the recent decline in mortgage rates is by no means an indication of a turning point. This is because investors tend to misprice the cost of armed conflict. By driving both defense spending and government borrowing higher, geopolitical tensions and armed conflict tend to result in lower growth and higher inflation. 

While the United States economy has cooled and tight credit conditions are likely to slow the pace of economic growth, the latest data on producer price inflation – a leading indicator of consumer price inflation – show a larger than expected uptick last month. A resilient U.S. consumer and an uptick in business investment could put a floor on bond yields and mortgage rates.