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As investors digest the potential fallout from President Donald Trump‘s targeted strike on nuclear facilities in Iran over the weekend, financial markets are delivering the first signs of what the conflict will mean for U.S. mortgage rates.
On Monday, the long-term bond yields that are closely tied to mortgage rates fell, suggesting moderate relief for mortgage rates in the immediate aftermath of the U.S. strike.
Mortgage rates for 30-year fixed loans most recently averaged 6.81% for the week ending June 18, according to Freddie Mac.
Traditionally, war or the threat of war drives demand for safe-haven assets like bonds, driving prices up and yields down. However, initially, bonds showed little reaction after the U.S. strike on Iran on Saturday, revealing few implications for mortgage rates.
In midday trading on Monday, 10-year Treasury yields began falling, reacting in part to falling oil prices.
Oil prices, which had run up since Israel launched an air campaign targeting Iranian sites and personnel, dropped more than 7% on Monday, despite Iran launching retaliatory missile strikes on U.S. military bases in the Middle East.
Iran’s counterstrikes appeared to be largely ineffective, and there were no initial reports of deaths or injuries to U.S. personnel. Investors were relieved that Iran’s retaliation did not target energy infrastructure in the region, sending oil prices lower.
“Oil prices rose initially, but have since retreated. It seems investors are still in wait-and-see mode—waiting to see whether there is an escalation of tensions,” says Realtor.com Chief Economist Danielle Hale.
Lower energy prices will help relieve inflation pressure, improving the outlook for Federal Reserve rate cuts. Thus, the falling oil prices, combined with remarks from Fed governor Michelle Bowman on Monday, sent 10-year Treasury yields lower.
Bowman, delivering remarks in Prague, said that she may push for a rate cut as soon as the Fed’s next policy meeting in July.
“Should inflation pressures remain contained, I would support lowering the policy rate as soon as our next meeting in order to bring it closer to its neutral setting and to sustain a healthy labor market,” Bowman said, according to a published text of her remarks.
The Fed has held its benchmark rate steady at a range of 4.25% to 4.5% since December, in defiance of Trump’s demands for the central bank to cut rates and lower borrowing costs.
Mortgage rates have remained stuck above 6.6% since last fall. While they are still unlikely to fall back below that threshold anytime soon, the muted reaction to Trump’s Iran strike could shave a few basis points off rates in the coming days.
However, if Iran at some point does target energy infrastructure in rival Saudi Arabia, expect oil prices to skyrocket, driving bond yields and mortgage rates higher.
“If there were further escalation, it could potentially drive oil prices higher, which could undermine recently improving inflation trends and make it trickier for the Fed to sort out the impact of tariff-related price increases versus oil price-related increases,” says Hale.
“This could make it more challenging for the Fed to calibrate policy at a time of transition in which it already faces goals that could be increasingly in tension.”