Mortgage rates cross 7% as yields hit 2007 high

Stocks ended Thursday roughly where they began, with the S&P 500 down 0.02% to 7,704.13, the Dow Jones Industrial Average down 0.31% to 51,349.98, and the Nasdaq Composite up 0.01% to 26,939.37. The flat finish hid a much larger move in the bond market, where the 10 year Treasury yield rose to 5.19%, its highest since 2007, and the 30 year reached 5.48%, a level last seen in 2004. Oil rose again, with West Texas Intermediate crude up about 1% to $93.12 a barrel and Brent above $104.

Two forces pulled against each other all day. The first was oil, which keeps rising because the Strait of Hormuz, the narrow sea passage that a large share of the world's oil is shipped through, remains disrupted. Expensive oil raises the cost of nearly everything that has to be moved or manufactured, so investors raised their guess about how fast prices will climb in the years ahead, and that guess is what sets long term bond yields. The mechanism is worth spelling out. A Treasury bond pays a fixed number of dollars each year for decades, so if those future dollars are expected to buy less, buyers will only take the bond at a cheaper price, and a cheaper price for the same fixed payments is arithmetically the same thing as a higher yield. Traders are now pricing a real chance that the Federal Reserve responds by raising its benchmark interest rate rather than lowering it, with prediction market Polymarket showing roughly 68% odds of a quarter point increase at the October meeting. The second force was diplomacy. Reuters reported that American and Iranian negotiators meeting in New York are discussing a phased deal in which Iran would allow shipping through the strait again in exchange for Washington lifting its economic blockade. Nothing has been agreed and neither government confirmed it, but the report alone was enough to pull stocks back from a morning loss, which tells you how much of the current oil price is fear rather than physical shortage.