A recent jump in Treasury yields has spiked rates, but a long conflict wouldn’t necessarily move them even higher
Mortgage market watchers have looked on in dismay in recent weeks as 10-year Treasury yields, a key driver of US mortgage rates, jumped in response to the geopolitical turmoil caused by the war in Iran.
That increase meant a February mortgage rate dip into the fives proved short-lived, with the average 30-year rate climbing to 6.11% last week and expectations of further declines fading rapidly.
The big question now facing the mortgage market as spring homebuying season looms into view: should the mortgage industry and borrowers now expect rates to tick even higher as oil prices surge and inflation expectations rise?
Much will depend on how long the conflict continues, according to Oxford Economics lead analyst John Canavan, who told Mortgage Professional America a swift end would likely spare any lasting negative impact to the US economy.
“It’s impossible to say with any strong conviction where things are headed and it really is just all dependent on the duration of the war, the duration of the effective closure of the Strait of Hormuz, and what that does for oil prices,” he said.
“Our basic outlook, though, is assuming that the war is over within the next couple of weeks, the broader underpinnings of the economy were quite healthy prior to the war. And we still think that those factors remain supportive.”
Existing tax measures could mitigate oil price impact
If the war were to end relatively quickly, it would still take time for oil prices to normalize – but that trend would still limit any damage to the US economy, Canavan said, particularly because the US is not as dependent as other nations on oil coming through the Strait of Hormuz.
Oxford had a “fairly optimistic” outlook on the economy prior to the war, he added, thanks in part to supportive tax changes included in the One Big Beautiful Bill Act providing larger tax refunds for consumers and tax incentives for companies to invest and build.
If the war ends quickly, those measures could come into play to help Americans manage some of the effects of temporary oil price inflation.
“The higher oil prices and higher energy prices will do a lot to counter the increased tax refunds for consumers but those tax refunds will also at the same time, to some degree, offset the negative impact of higher energy prices for consumers,” Canavan said.
“So we think overall, provided the war ends relatively quickly, that the US economy will remain relatively healthy, albeit just a bit slower than had been in our prior baseline.”
Higher 2026 mortgage rates not certain despite Iran war
Even a lengthier war might not necessarily send mortgage rates soaring throughout the course of the year.
That’s because while the near-term trend for Treasuries will likely be upward if the war rumbles on, a protracted conflict would raise questions about monetary policy and whether Federal Reserve rate cuts could come into play.
In turn, that could ultimately push Treasuries lower – with mortgage rates following in their path.
“At some point if the duration of the war continues and oil continues to increase for a longer period, then the psychology will start to shift and people will get a little bit more concerned about the impact of the war and rising energy prices,” Canavan said.
“The risks to the economy become greater as that occurs. Then you might start to see Treasury yields actually decline. So even though oil prices may be higher, even though inflation concerns might still be significant, at that point you’re going to start to see a greater shift in the market towards a more dovish expectation for central bank outlooks.”
Increased inflation expectations have fueled speculation that central banks could put rate cuts on ice for the remainder of the year to avoid further inflaming price growth – but those inflation worries are temporary and conflict-based, Canavan pointed out.
Instead, central bank concern about economic growth taking a hit from the war could take center stage. “At some point, central banks will need to understand that this oil-driven inflation increase won’t be permanent,” he said.
“Once the war ends and oil gets flowing again, that will come back down. And so central banks will become a little bit more concerned about the negative economic implications.”
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