Oil is supposed to scare bond investors, since a price spike usually pushes interest rates higher. Brent crude was trading near $112 a barrel on Oct. 22, more than 50% above its level before the Iran war began in late February, yet Treasuries rallied hard as stocks slid.
That surprise could not come at a better time for home buyers. Mortgage rates had climbed for seven straight weeks to three-year highs, squeezing buyers’ purchasing power, before finally easing. Whether the relief lasts depends on what the Federal Reserve does next.
Traders pull back on Fed hike bets
The bond rally reflects a fast change of heart about the Fed, which meets on Oct. 28. Fed funds futures put the odds of an October hike at about 5%, down from 15% on Oct. 21 and 37% at the end of September, while traders now see roughly a 75% chance of a hike by December, as reported by Yahoo Finance. As recently as Oct. 21, a year-end move had been fully priced in.
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Fed officials helped cool those expectations. Governor Christopher Waller, New York Fed President John Williams and Vice Chair Philip Jefferson have all signaled that the central bank could wait, according to TheStreet. Chair Kevin Warsh has also said he does not prejudge meetings.
The backdrop still leans hawkish. The Fed raised its benchmark rate by a quarter point to a range of 3.75% to 4% on Sept. 16, its first increase since 2023. The vote was unanimous, a clear sign that officials were united on the need to fight inflation.
Consumers are still feeling the energy shock in their wallets. Consumer prices rose 3.7% from a year earlier in September, slightly above forecasts, with gasoline up 34.2% over the same stretch. That is exactly why traders had been bracing for the Fed to keep tightening.
Why oil isn’t rattling bond investors
Here is the twist. The five-year breakeven rate, which compares regular Treasury bonds with inflation-protected securities to gauge expected inflation, points to price growth of about 2.4% a year over the next five years, unchanged from before the war. In other words, investors are not betting on a lasting inflation wave.
A weaker stock market is adding fuel to the rally. Investors have been moving money into government bonds as stock and tech markets cool, and a sharp drop in September housing starts added to the cautious mood. When money rushes into bonds, prices rise and yields fall.
The selling pressure on the other side appears to be fading too. Bloomberg strategist Cameron Crise saw signs that some large investors were scrambling to unwind bets on higher rates, and the rally held up through the afternoon sale of five-year inflation-protected Treasuries, according to Yahoo Finance.
Stable inflation expectations matter a great deal to policymakers. Waller has pointed to energy costs tied to the Iran war, AI-driven price increases and looming tariffs, and said his biggest worry is that higher inflation expectations become entrenched. If markets keep signaling they are not, the case for rushing into another hike weakens.
Mortgage rates ease as housing cracks show
Borrowers are already seeing a small benefit. The average 30-year fixed mortgage rate fell to 7.32% from 7.40% the previous week, and the 15-year rate slipped to 6.68% from 6.71%, according to Freddie Mac’s survey. Chief economist Sam Khater said the decline offered “some relief to prospective homebuyers.”
More relief could follow if yields stay lower. Zillow said earlier this month that “it’s not out of the question that rates will decline as rapidly as they rose,” which would draw buyers and sellers back into the market, TheStreet reported. For now, that remains a possibility rather than a forecast.
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The damage from the fall surge is plain to see. Pending home sales fell 7.3% in September to the lowest reading in the history of the index, with the National Association of Realtors chief economist Lawrence Yun blaming “fast-rising mortgage rates.” Yun added that rates “could be topping out” and that buyers and sellers may be holding back until they improve.
What borrowers should watch next
The Fed’s Oct. 28 decision is the next big test, and forecasters are not yet calling for a rapid rate cut. Fannie Mae’s October outlook sees the 30-year rate averaging 7.4% in the fourth quarter and 7.5% across 2027. That is a sharp jump from the 6.8% it projected for the quarter just a month earlier.
Buyers may still find room to negotiate. Sellers are increasingly offering concessions such as rate buydowns, while Jake Krimmel, senior economist at Realtor.com, noted that buyers have more negotiating leverage in more markets but that “a bigger negotiating advantage doesn’t always mean more affordability,” according to MPA Magazine. A rate buydown lowers the rate but not the purchase price, so buyers should read the terms closely.
About two-thirds of the 99 metros tracked now favor buyers outright or are moving that way. Still, Krimmel warned that buyer leverage and purchasing power are moving in opposite directions, meaning a lower rate alone may not be enough to revive demand right away.
Related: Goldman Sachs has a new warning for the housing market for 2027