US Treasury Secretary Scott Bessent’s effort to lower borrowing costs rests on expanded buybacks of long-dated Treasuries and the prospect that an end to the Iran war would ease rates. Mortgage pricing has moved sharply: the Mortgage Bankers Association put the average 30-year fixed rate at 7.49% in the week to October 2, up from 7.30%, while Freddie Mac printed 7.28% on October 1, the highest since November 2023. The same series was 5.98% on February 26, as the 10-year Treasury yield rose from 4.02% then to 5.31% on Monday, its highest since May 2002; lender margins held at about 2 points, implying the rise has come from the underlying yield rather than fees.
Break-even inflation derived from inflation-protected bonds edged from 2.28% on February 26 to 2.36%, a 0.08-point increase, while the real component rose from 1.74% to 2.91%, up almost 1.2 points. The Fed lifted rates by a quarter point to 3.75%-4.00% on September 16; since then the two-year yield is up 0.05 points, the 10-year up 0.26, and Freddie Mac’s mortgage rate has climbed from 6.95% to 7.28% even as oil is lower than on hike day. The Treasury doubled long-dated buybacks on August 19 for a programme running September 9 to November 4; the 10-year yield fell to 4.66% on the announcement but stands at 5.27% now. A ceasefire would mainly unwind the 0.08 point in expected inflation, leaving mortgage rates largely dependent on whether the real yield retreats from around 2.9% enough to pull borrowing costs back under 7%.
Election Uncertainty And Market Positioning
As we approach the crucial November 3 election date, we must prepare for sharp moves in the bond and energy markets. With the 10-year Treasury yield sitting at a multi-decade high of 5.31%, we recommend focusing on the spread between nominal yields and inflation-protected securities. Derivative traders should look to position for a potential pivot, especially since the Treasury’s supportive bond buyback program is scheduled to wrap up on November 4.
We believe betting solely on a post-election ceasefire to crush borrowing costs is a high-risk strategy. The conflict has only added about 0.08 percentage points to long-term inflation expectations, meaning a peace deal alone will not bring yields down significantly. Instead, we should use options on crude oil to hedge against the risk of resumed strikes, which could quickly push energy prices back to previous highs.
Yield Drivers And Strategic Opportunities
The real driver of high borrowing costs is the yield left after inflation, which has surged by nearly 1.2 percentage points to 2.91%. If the Federal Reserve hints at a December interest rate hike due to lingering energy costs, this real yield could easily push past 3%. We should consider using interest rate swaps or shorting Treasury futures to benefit from this continued upward pressure on yields.
Historically, when government buyback programs end, long-term yields tend to rise as a major source of demand is removed from the market. With the current buyback program running at a doubled pace before ending on November 4, we expect a liquidity vacuum in long-dated bonds right after the vote. Positioning for steeper yield curves by shorting the 30-year bond while holding shorter-term contracts offers a strong risk-reward ratio.
To time these entries, we must monitor the daily split between expected inflation and real yields rather than waiting for lagging mortgage reports. A ceasefire that fails to drag the 10-year yield below 5% will confirm that structurally high rates are here to stay. On the other hand, a decisive drop in real yields below 2.5% would be our signal to aggressively buy long-duration bond derivatives.
