Since the outbreak of the military operation in Iran, there have been varying levels of spillover from rising oil prices to the bond market. There have been notable pockets of time where the correlation broke down, but when viewed in less granular detail, oil prices and bond yields have moved higher together over the past week. Now this morning, there’s a new mega-surge in oil (presumably due to Iran’s leadership announcement and its implications for more military escalation) and the correlation is undeniable when viewed over a short time period. Today’s first chart shows there’s no question of that short-term correlation. 

The second chart shows that the correlation is definitely not proportional (the scaling is set to the same proportions used last week in order to illustrate the size of the jump in oil).

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Before this morning’s jobs report was released, mortgage rates were on track to end the week at their highest levels in several weeks. This was due to an ongoing mega-spike in oil prices spilling over to the bond market (higher oil = higher inflation implications, and bonds hate inflation). The jobs report saved the day, albeit in a morbid way. It was one of the weakest jobs reports in years with unemployment continuing to trend higher and the job count falling deeply into negative territory. The jobs market is the only thing as important to bonds as inflation, and job market weakness tends to push rates lower. Bonds recovered back to levels that were right in line with yesterday, thus allowing most mortgage lenders to adjust their rate offerings accordingly.

Oil Impact Ultimately Shunned in Favor of Jobs Report Implications

It was a super interesting day for the bond market. Yields rose to the week’s highs overnight as oil prices continued to surge. We knew we’d get at least some sort of reaction to any big beat/miss in the jobs report and today’s miss was certainly big.  At first, the reaction was logical. Bond rallied. But the paradox set in quickly and yields hit new highs by 9:30am. Fed funds futures continued arguing for a bond rally, as did lowest S&P levels since November. One could say “bonds finally came to their senses,” or “the initial selling was a quick bout of profit taking,” but no explanation would have been obvious upfront. Since 9:30am marked the shift, we’d have to go with the vague “positional considerations” and stock market safe haven excuses. Either way, with bonds ending up flat despite oil cracking $90/bbl, it was good enough.

Econ Data / Events

Average earnings mm (Feb)

0.4% vs 0.3% f’cast, 0.4% prev

Non Farm Payrolls (Feb)

-92K vs 59K f’cast, 130K prev

Participation Rate (Feb)

62.0% vs — f’cast, 62.5% prev

Retail Sales (Jan)

-0.2% vs -0.3% f’cast, 0% prev

Retail Sales Control Group MoM (Jan)

0.3% vs 0.2% f’cast, -0.1% prev

Unemployment rate mm (Feb)

4.4% vs 4.3% f’cast, 4.3% prev

Market Movement Recap

08:16 AM Additional weakness overnight amid ongoing oil surge. MBS down an eighth and 10yr up almost 3bps at 4.164

08:35 AM post payrolls, 10yr yields down 1.5bps at 4.121 and MBS up 2 ticks (.06). 

10:09 AM Big reversal into weaker territory. MBS down 6 ticks (.19) and 10yr up 4bps at 4.176

11:59 AM Nice recovery with MBS down only 1 tick (.03) and 10yr down 0.3bps at 4.133

02:03 PM Best levels of the day. MBS up 2 ticks (.06) and 10yr down 2.3bps at 4.113

03:21 PM Off the best levels now with MBS down 2 ticks (.06) on the day and just over an eighth from the highs.  10yr roughly unchanged at 4.138

Mortgage application activity surged last week in response to headlines of mortgage rates stably holding multi-year lows. The Mortgage Bankers Association (MBA) reported an increase of 11.0% on a seasonally adjusted basis for the week ending February 27. Refi applications once again led the charge, jumping 14.3% from the previous week and 109% higher vs the same week one year ago. Conventional refi apps rose 20% for the week, marking the fourth consecutive weekly increase and the strongest pace since 2022. Purchase demand also strengthened. The seasonally adjusted Purchase Index increased 6.1% from one week earlier and was 10% higher than the same week one year ago. Lower rates and a gradual improvement in housing inventory continue to support buyer activity as the spring market approaches. The composition of activity shifted further toward refinances. The refinance share of total applications increased to 59.8% from 58.6% the prior week, while ARM share rose to 8.8% . FHA share decreased to 15.8% , VA share declined to 17.1% , and USDA share remained unchanged at 0.4% . Notably, the present week has seen a significant shift in rates with the average lender jumping back to early February levels.  [thirtyyearmortgagerates]

It’s shaping up to be a frustrating day market watchers. Decades of experience tells us that bonds should rally fairly sharply on a day where nonfarm payrolls miss the forecast by the widest margin in more than a year.  At -92k vs +59k, today fits that bill.  And like you’d expect, bonds rallied sharply right at 8:30am ET. But the rally was short-lived and it’s not a huge surprise.
That’s not a hindsight assessment either.  It was actually our first analytical reaction. Reason being: the unemployment rate carries more weight than NFP these days, and it was only up to 4.4% from 4.3% last month. Beyond that, we can consider the payroll count was distorted by health care strikes (and noted by BLS at the top of the report). With health care doing so much heavy lifting, the impact on NFP can’t be overstated.

Finally, away from the data, we have the ongoing surge in oil prices which kicked into even higher gear today. At this point, inflation implications can’t be ignored. We normally push back on the oil vs 10yr correlation because it’s so frequently irrelevant–especially over the shortest time horizons.  The scope of movement can also be very mismatched, even when correlation is present. For evidence, look no further than the long-term chart.

But in the medium-short term, the correlation is definitely causing problems for bonds. After all, even a weak correlation is going to hurt when oil is moving this sharply–especially if it’s moving for reasons that also imply additional Treasury issuance.