In a week full of surprising developments, mortgage markets found themselves caught between easing inflation data and rising bond yields — a combination that left many investors scratching their heads. Despite clear signs that inflationary pressures are cooling, mortgage rates rise, highlighting the complex and often contradictory nature of today’s global economy.
Tariffs Take Center Stage
The most market-moving headlines came from trade policy. On Wednesday, President Trump announced a 90-day pause on higher tariffs for most countries, offering time for negotiations. However, tariffs on Chinese goods will rise significantly. While this announcement initially suggested a temporary easing of tensions, markets responded with a sharp bond selloff on Thursday and Friday — a move that still lacks a clear explanation.
Analysts have floated several possible causes for the selloff. One theory is that investors worry about potential retaliation from China, particularly the possibility that it could sell off its holdings of U.S. Treasury bonds or mortgage-backed securities (MBS). With foreign countries owning roughly 15% of U.S. MBS — and China and Japan as the largest holders — this remains a valid concern, even if the likelihood is uncertain.
Some reports also point to forced bond sales by investment firms trying to meet margin calls after recent stock market losses. Additionally, some foreign investors may simply be pulling out of U.S. assets due to rising geopolitical uncertainty. These moves have weakened the dollar and pushed bond yields higher. Regardless of the precise reason, mortgage rates rose sharply in response.
Encouraging Inflation Data
Despite the chaos in bond markets, inflation data painted a more reassuring picture. The Consumer Price Index (CPI), one of the most widely followed indicators, showed a notable drop in March. Core CPI — which excludes the volatile food and energy sectors — rose just 2.8% year-over-year, falling below expectations and marking the lowest annual rate since March 2021.
While the reading still sits above the Federal Reserve’s 2.0% target, it reflects a sharp decline from its 6.6% peak in September 2022 and from 3.9% in January of last year. Categories like used vehicles, prescription drugs, and airline fares saw meaningful price reductions, helping pull the index lower. However, housing-related costs, especially rents and owner-equivalent rents, continue to keep overall inflation elevated.
Another major inflation gauge — the Producer Price Index (PPI), which tracks wholesale prices — also brought good news. March’s core PPI unexpectedly dropped 0.1% from January, well below the forecasted 0.3% increase. On a year-over-year basis, PPI rose by just 3.3%, slightly down from 3.4% in February. Although investors usually give PPI less weight than CPI due to its narrower economic scope, this report reinforces the broader trend of slowing inflation.
Why Do Mortgage Rates Rise?
This is the question perplexing many investors and economists. Normally, lower inflation readings support lower interest rates, including mortgage rates. Inflation erodes the value of fixed-income investments like bonds, so when it comes down, bond prices typically go up — pushing yields and mortgage rates down.
But that’s not what happened this week.
Instead, rates surged higher, raising speculation about the underlying causes. From fears of Chinese bond retaliation to margin call-driven selloffs and broader geopolitical risk, it seems that the current moment in the markets is driven more by sentiment, speculation, and risk aversion than by economic fundamentals.
What’s Next?
Looking ahead, investors will be closely watching for additional clues on both inflation and economic growth. Several key reports are on deck:
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Import Prices (Tuesday): This report can signal how foreign goods are impacting domestic price pressures, especially in the wake of tariff changes.
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Retail Sales (Wednesday): With consumer spending accounting for over two-thirds of the U.S. economy, this report offers critical insight into overall economic health.
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Housing Starts (Thursday): A vital indicator for the real estate and construction sectors, this data will shed light on how builders are responding to market conditions.
The bond market will close early on Thursday and remain closed on Friday in observance of Good Friday, which could dampen trading volumes and increase volatility in the short term.
This past week served as a reminder that financial markets don’t always respond in predictable ways. Despite strong evidence of easing inflation, uncertainty around trade policies, foreign investment, and stock market volatility led mortgage rates higher — an outcome that challenges conventional wisdom.
For homebuyers, sellers, and investors, the key takeaway is this: stay informed, remain flexible, and be prepared for continued volatility as global markets digest a mix of encouraging data and unpredictable political shifts.
