In the first full trading week of 2025, the bond market has continued its path of resistance...lower in price and higher in rate.

Let's discuss what happened and prepare for the week ahead.

"When the levee breaks, I'll have no place to stay" When the Levee Breaks by Led Zeppelin.

Mixed Auction Results

Our government runs deficits annually, which means the Treasury Department is required to sell new debt by way of Treasury Bills, Notes, and Bonds to fund this deficit.

Every couple of weeks, the Treasury Department auctions off bonds and longer-term debt like 10-year Notes and 30-year Bonds, which have an impact on mortgage rates. If auctions are well received and the buying appetite is good at the current interest rate, then mortgage rates do well. The opposite is true.

With that said, the 10-year Note auction this past week was not very good, and buyers needed to be compensated with higher yields or interest rates to purchase all the new debt. This applied pressure on interest rates, pushing the 10-year Note briefly above 4.70%; the highest level since April.

But then the very next day, the 30-year Bond auction did particularly well with a solid buying appetite. This was welcome news and highlights how higher interest rates are a cure for higher interest rates. Meaning, the nearly 5% yield on the 30-year Bond attracted buyers and this stabilized long-term interest rates, like mortgages.

An important theme going forward is the government taking important measures to significantly lower the pace of our new debt creation. In 2024, the U.S. had a $2 trillion deficit, meaning we spent $2 trillion more than we took in as revenue. As Fed Chair Powell has said over and over, the trajectory of our new debt is unsustainable and an ultimate threat to our economy.

Mixed News on Jobs

The ADP Report, which shows private job creation (excluding government jobs), came in well below expectations. This weak economic reading was offset by the JOLTS report, which showed a larger than expected increase in jobs available. This offsetting news helped bonds recover from their worst levels of the week.

With the economy enduring a transition between Presidents, which brings a different fiscal policy, many companies are neither hiring nor firing employees. They are waiting to see what happens in Washington DC.

Inflation Remains a Concern

Both domestically and internationally, recent inflation readings have elevated concerns that inflation is remaining sticky and may indeed be re-accelerating. This will be an important factor to watch in the weeks and months ahead, as it will determine whether the Fed can cut rates further later this year.

Oil Edging Higher

Something to watch together is the price of oil. A barrel of "black gold" has climbed throughout the month of January, hitting a multi-month high of $75 this past week. High oil prices are inflationary, and the opposite is true. If we are looking for a sign that long-term rates are going to moderate, we should be looking for a decline in oil prices.

When The Levee Breaks

As the famed Led Zeppelin song goes, when levees break, bad things happen. As seen in the chart below, over the past 3 1/2 months, mortgage bonds, which price mortgage rates, have broken a series of support levels (levees) that have ushered in further price losses and rate increases.

Interest rates are moving higher right now, and an important mark to follow is the 10-year Note yield and 4.75%. That number represented the peak of 2024, and the 10-year Note traded to within a whisker of that level this past week and edged lower. Let's hope that 4.75% holds as a ceiling of yield resistance or levee and prevents rates from moving further to the upside.

30-yr Mortgage Rates

The 30-year FRM averaged 6.93% as of January 9, 2025, up from the previous week when it averaged 6.91%. A year ago at this time it was 6.66%.

Bottom Line: Rates have continued to edge higher since mid-September, but are trying to stabilize as the 10-yr Note tests the 2024 highs of 4.75%.

Looking Ahead

Next week, it is about the inflation portion of the Fed's dual mandate. We are going to see readings on wholesale/business inflation (PPI) and the more important Consumer Price Index (CPI). There will also be housing news and plenty of Fed speakers making comments on the economy and the path of rates, all of which can move interest rates.