Mortgage bonds erased the entire post-CPI rally and closed at the lows. UMBS 5.5 finished at 97.34, down 0.11 on the day, the 10-year Treasury at 4.970%, up a basis point, and the average 30-year rate at 7.12% — the highest level since early 2025.
There were two markets in this session and only the second one counted. August CPI came in hot on core — 0.3% against a 0.2% forecast — and after a twelve-minute selloff, bonds did the opposite of what that print should produce. UMBS 5.5 ran from 97.39 at 8:32 to 97.87 by 9:04, and the 10-year traded down four basis points to 4.920%. Then it turned, at almost exactly 9 AM, and spent the next six hours giving all of it back. The close at 97.34 is below where the morning selloff bottomed out.
The rally's logic was sound, which is what makes the reversal worth understanding. A hot core print pushed Fed Funds Futures to roughly 90% odds of a hike at next week's meeting, and the long end rallied on that. Long-term rates can want the Fed to move, because a central bank that acts on inflation is one that protects the value of a ten-year bond — the risk priced into this market lately has been Fed inaction, not Fed action. What the rally did not have was durable buying behind it. The reversal lined up with a modest move in oil, but the selling ran well past what oil justified, which is the signature of short covering: traders closing out bets on higher rates rather than new money betting on lower ones. That flow happens once and then it is finished. The underlying paradox never actually broke — the 2-year closed up 0.040 while the 30-year Treasury closed down 0.010, so the curve kept flattening even as the whole market sold. The positioning behind the trade ran out; the idea behind it did not.
What that leaves you with is a day where the morning sheets were the good ones. Lenders repriced positively in the morning and took it back in the afternoon, and the average 30-year finished around five basis points higher at 7.12%. The daily move is small — measured against yesterday morning, the average lender is close to unchanged — but the level is the story. Rates are now at their highest since early 2025, and this is the fourth session in a row that has ended at or near the worst levels of the week. Next week is the event: the FOMC meets September 15-16 with the decision on the 16th, and today's CPI was the last major inflation reading the committee sees before that vote. There is no first-tier data between now and then, which means today's close is the working level going into it.
— David Burson, NetRate Mortgage