Global Pressures, Sticky Rates: Forces Driving Interest Rates Higher | Optimal Insights | June 2, 2025

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Welcome to Optimal Insights, your weekly source for real-time rate data and expert capital markets commentary brought to you by Optimal Blue. Let's dive in and help you maximize your profitability this week.

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Welcome to Optimal Insights, your weekly source for timely market analysis and expert commentary from Optimal Blue. I'm your host, Jim Glennon, vice president of hedging and trading client services at Optimal Blue. Our clients and industry partners have long relied on Optimal Blue for trusted insights and commentary, and these podcasts are an evolution of our commitment to keeping the industry informed. Let's dive into today's episode. Hello, welcome everybody. Today's Monday, June the 2nd. We're already in June. Yeah, a lot of interesting stuff going on.

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In the interest of keeping you informed, we're always going to strive to bring you up to the hour current events. We'll cover some things today that are pretty current in our market update. We're also going to step back a little bit and just talk about how some of these things and some other things that are a little bit more broad across the globe are affecting interest rates and keeping interest rates stubbornly high. We'll talk a little bit about why rates are so sticky right now, what, if any, hopes there are for rates to drop in the next few years.

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Speaking of rates, OBMMI conventional 30 year, 6.84. So we got a little bit of a rally late in the week last week, but still seeing dangerously close to 7%. The volume is still good. We're still seeing decent purchase volume through this spring and early summer. And seeing that refi volume continue to pick up too for a lot of reasons we've talked about on this podcast before, right? A lot of folks looking to unlock equity from their homes to pay off much higher interest rates on things like credit cards and

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Unsecured debt and cars and things like that. So anyway, seeing better volume this year than last year, still tracking towards a 15-ish percent increase over last year, which is just a little bit lower than what the MBA has been predicting. And again, a lot going on in the market. So let's check in with Alex and Jeff and see what's going on in the economic world. Okay. Welcome Alex. Jeff, how are we doing this Monday? Doing well. Doing well.

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All right. Let's talk a little bit about a couple of things. wanted to cover, obviously we want to get into what's going on in the market right now. What's new over the weekend? What's new last week? What should we be looking out for later this week, including unemployment, some big things going on. But we also, we're going to take a step back after that and just talk about where interest rates are today and try to step through why rates are stubbornly high and why everybody's forecasts are continuously pushing out higher rates for much longer into the future, to 27, 28, even beyond that.

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Let's start with you, Alex. What was big last week in terms of numbers and what should we be waiting for this week of first week of June? Yeah, last week, end of the month, so we get PCE data that Fed's preferred metric for inflation. The headline number looked to be in a pretty healthy spot on a downward trend towards the old school 2 % target. The core number was 2.5 and the non-core number was 2.1%. So right where the Fed's kind of targeting right now. There's slight copyouts in there.

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the number was really helped by the financial services aspect of the PCE, which is the aspect that the PCE has the CPI doesn't. So that's any money is going towards insurance monies or anything you're doing in the financial markets in addition to recreational services. And I was actually looking at the variance on both of those. Those are both very high variance categories. So they swing quite a bit month to month. And so we could see that swing back on the next PCE. never want to give, I guess, good news.

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without a caveat, but here I am. We could see it swing back, but this number, which was for April, it comes out the last week of the month, but it is for the preceding month, which there was a lot of volatility in the financial markets during that month. That could have been part of that low reading on the financial services reading, but overall, it looks like a strong reading and moving in the right direction for what the Fed's been looking to do long term since the end of the COVID era. Yeah, that's a cool nuance. Lower insurance prices, if that holds, that would be a welcome development, obviously.

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Right. Yep. It'd be welcome development, but keep in mind, you know, that we're just heading into hurricane season, you know, such and such. So there's always readings that could push in the opposite direction. For sure. All right. What else are we seeing? So those are the big, I mean, we had the GDP revision, which was obviously negative this time around, right? But otherwise looking forward, or you know, looking forward into this week, what do we have? Yep.

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Given that it's the first week of the month, this Friday, we'll get non-farm numbers. It's kind of expected to be right where we've been seeing it the past couple of months, 120-something thousand new jobs, 4.2 % unemployment. Imagine a lot of those jobs will come in the healthcare space if I had to put money on it. But what I've been watching recently is the weekly new jobless claims. That one's been spiking a bit. We saw 240K last week and we saw an upward revision for the previous. So two weeks ago, jobless claims numbers.

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So definitely just keep an eye on that as rising unemployment could be on the radar. Yeah, that weekly number can definitely be a leading indicator. As you said, it's more timely than the unemployment report. And then there's also, I keep an eye on residential construction jobs. Logan Bodeshami from HousingWire got me onto that one. That could be a leading indicator as well. And that's kind of topped out. It hasn't headed south yet, but it's kind of flat to starting to break south. So that's the one you can keep an eye on.

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The St. Louis Fed has a good chart on that that's monthly. And yeah, I feel like a month ago or so, we were talking about Doge and how that was going to affect the unemployment numbers in May. So we may see some of that here later this week too, right? With May unemployment potentially being affected by layoffs in the government. Right. To shoot it back to PC for just a moment, they were saying this was the first release we might start to see inflationary readings from Doge, not rather Doge cuts, the tariffs coming into effect.

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But again, I am more of a June, July skeptic. So we'll have to see how that number continues to progress. But as to the doge is what you were talking about, as of last week, sounds as if Elon Musk has stepped back from that. A lot of his top guys in the doge program, you know, left with him or stepped aside as well. So I think the majority of those doge cuts that have taken place are finalized. And at end of the day, as Powell said about a month ago now, he didn't expect it to be

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a major impact on the US labor market. Obviously, if in the DC area, you're seeing quite a bit of unemployment, but again, that's much more localized than nationally. Right. It'll be still interesting to see how that plays out. mean, some of the biggest layoffs are blocked by judges. Some were made into much smaller layoffs after initial huge announcements of six figures. So to me, it's still a bit muddy what the actual reality of that is, but I suppose that would

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you know, that would become obvious in the surveys and obvious in the actual claims for benefits, for unemployment benefits. Absolutely. All right. So anything new in tariff, anything. What's big in new tariff news over this past week since we last talked? So it goes back and forth every week it feels like. This was quite a quick back and forth, but a district court said that the section 301 tariffs, which is the blanket tariff policy when Trump says he's going to put, you know,

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30 % on Thailand, for example, this would fall under that Section 301. This court said that this was not a legitimate use of that Section 301 tariff power. And so they blocked it. The Trump administration was ready. I don't think there was really any overlap. They appealed it immediately. And so those tariffs are now back in effect on appeal. And Lutnick and everyone that's a hardliner on these tariffs has said that they'll take it all the way to the Supreme Court if they have to.

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They also have a backdoor that they can use. It goes all the way to Supreme Court and Supreme Court says you're not allowed to use these Section 301 tariffs in this manner. They can fall back on what are called the Section 232 tariffs. Those are the sector-specific tariffs. When we see 25 % on steel and aluminum products, that's an example of those Section 232 tariffs. That one, as of right now, seems to be a much more legitimate use of the power. This is the one that they can say it's on national security grounds. would expect to see, because they do seem to want to have these tariffs in effect,

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that what they'll end up doing is just creating a sector specific tariff for every single product category on quote unquote national security grounds. Yeah. I mean, feels like this strategy was developed and discussed years ago, right? Before even the campaign, just to keep all of this stuff tied up in the courts and to have three or four different avenues that we could go as each piece gets shot down probably predictably. mean, bravo. seems to be, you know, the administration seems to be confident with...

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the direction we're going and yet it doesn't seem like it's going away anytime in the next three and a half years. Okay. So that does relate to our next topic and all of these things you just said. Let's look at it more broadly, more historically, more internationally. Just rates are high. That was a main discussion at the MBA conference last week and pretty much a discussion anytime you have a strategy talk with a client or with a borrower. Rates are high right now historically.

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At least if you look back over the past two decades, obviously higher than we would like, but we've all gotten used to them. I think at this point being above 6 % and that's a good thing because it seems like they're going to be there for a very long time. There's some things we can do to work around that in terms of affordability and we'll get into that as well. Some of that's going to involve shorter term rates and arms and stuff that we've talked about on the podcast. Let's generally wrap about why are rates stubbornly high? What are the effects on that right now?

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And just a little set even further, maybe set the long-term stage even further. One of the things I've been looking at is even the – usually we're used to looking at the 210 yield curve as kind of indication for shape of the yield curve. But looking even further out, there's a widening spread between the 10-year and 30-year yield curve as well. So looking even further out, expecting rates to remain.

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stubbornly high. So I think that's kind of another way to level set as well, right? That 10, 30 year being even more of a canary in the coal mine for some of these long-term economic imbalances that we're going to be getting to. So, you know, as you said, Jim rates well above 6%, where OBMMI almost touched 7 % over the past week or so, 10 year hovering right around four and a half. The 30 year treasury yield trending even higher than that. So just wanted to level set.

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in that regard as well for some of the things we're going to be talking about here. It doesn't look like rates are coming down anytime soon like we thought maybe they were at the beginning of the year. Yeah. It's more like you said, it's not just mortgages. think about a 30-year, most people think mortgage, but the 30-year treasury is also creeping higher well above the 10-year. Some of that is not related to our industry. It's just the overall opinions and the obvious trajectory of nations taking on debt and people taking on debt.

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and that's probably going to perpetuate and become a larger and larger issue over the next decade. And this isn't just about Fed expectations. mean, this is kind of a global problem. The Fed isn't going to just cut rates on its own without looking at the entire global picture. I think when you look at the longer end of the US yield curve, it's very much a risk on moment. And there's a conglomeration of factors that's contributing to that. As you point out, Jim, there's the big, beautiful bill currently.

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In the Senate, while Republican bills are generally pretty fiscally conservative and fiscally hawkish, this one isn't. In its current form, it's expected to add $3 to $4 trillion in new deficit spending. That's all going to have to be financed with debt. Then in addition to that, on just the US side, there's about 30 % of GDP, about $9.2 trillion in US debt is maturing this year and all that debt has to be refinanced. When the bond markets are looking at all this debt coming into the market, they need

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lenders for that debt. The only way to attract new lenders into this space and to compensate them for the risk of default, 20, 30, 40 years down the line, which is what Jeff was talking about, the rising rates on the very long end of the curve is to compensate them with higher yield. And so we're seeing those 10 and 30 year numbers creep up. 30 year touched 5 % last year. It's a little under 5 % this morning, but that was kind of a big, one of those kind of mental barriers that markets don't like passing. They don't like passing round numbers. The 30 year and 20 year actually, I believe the 20 year also touched 5%.

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just very briefly. And then, like you said, the 10 years floating around 4.5%. And that's just all bond markets trying to digest this unfathomable amount of debt that they have to sell to the world this year. Obviously, we've talked about this, but we had Moody's downgrade US debt, what was that, about a month ago. Obviously, that was kind of a big, big event that, again, theoretically, investors would require even more yield to be compensated for.

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perceived increase risk of default, even though that's kind of unimaginable. But Moody is essentially saying there is a slight increase in that risk. So just one other factor added on top of it, of these increase in yields. Yeah. Little factors are very heavy when you're talking about the amount of trillions that we're talking about here, right? We were hoping that the curve would get steeper because short-term rates would drop, but right now it's

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It's a little bit more influenced by the fact that longer term rates are going up for all these reasons you all are talking about. It's not just the US taking on debt as well. We've got similar credit grades. Those are European partners. They're also flooding the market with debt as they increase their defense spending. We've got, believe, I know both Canada and Germany are both some of the still AAA rated credits out there and they're both flooding the market as well. Like I said, they're increasing their defense spending. Germany, France, and the UK all saying they're going to

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put a lot of money towards defense spending and that's all going to be deficit funded. that decrease in globalization that we're seeing right now, whether it's because of terrorists, because of defense spending is pretty interesting. Something that's just caught my eye over the past week as something to think about. Some people may frame that as individual countries are doing their part, or you may frame it as a decrease in cooperation where we had this. With globalization, you can think of it as

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Yeah, I suppose it's two sides of the same coin. I tend to think of it as cooperation where everybody can help each other out. But certainly, there has been a big focus on European countries spending more on defense spending, as you said, because they theoretically can only rely on themselves at this point. Yeah, it is. It's again, unfathomable amounts of money, right? mean, defense spending is going to be any nation's biggest spend. And as you said, we seem to have hit this

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peak of globalization over the past decade maybe where all these costs, they're like socialized, they're spread across all these different nations that have basically agreed to protect each other if there's any sort of conflict. But now everyone's kind of taken a step back and realizing that that wave is going in any other direction. So we're all having to then spend, especially other nations in Europe particularly, having to spend money on their own defense, which is

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a tremendous amount of money that's not been contemplated previous to now since World War II. Yeah. It's not as if the US is cutting its defense spending. think we're on track for the first trillion dollar defense budget here either this year or in the coming one or two years. Again, we can get into the bullet points of where this money is being spent and what it's being spent on. But at the end of the day, what you need to know in the mortgage market is that there's a limited number of dollars out there and they're all chasing the highest yield that they can. As these yields go up on government debt, the

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quote, unquote, risk-free rate. Everything downstream of that, including your mortgage rate, is going to rise as well. Yeah, well said. Going back to the big, beautiful bill, one item I think we wanted to talk about was this taxing of foreign investors. Section 899 is a new surtax on investors from countries with discriminatory tax policies. So essentially taxing investors of treasuries. Alex, I think you have the numbers on that.

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Yeah, if this bill were to pass, foreign investors would be facing a 5 % tax initially, then each subsequent year after that, it would increase by an additional 5 % up to a cap of 20%. So looking at a 20 % additional tax on your capital gains is an extremely steep tax to be paying. And so the risk here is a capital flight, essentially. If you know you're going to be paying even 5 % additional tax.

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in that first year on your capital gains, you could choose to move that money elsewhere into a market that isn't going to tax this heavily. As of year to date this year, we've seen European markets in particular perform pretty well compared to the US stock market. For the last decade or so in this peak globalization period we've been talking about, the US stock market has been the sole outlier, the one that really outperforms all the others. Looking at north of 7 or 8%,

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S &P 500 growth over that entire period. And again, they could just take more dollars out of the US economy and put them into other equity markets. Yeah, we've been so investor friendly. And that's a huge find in that bill. I feel like it took weeks even for that to get into the mainstream media that that was in there. just, you know, again, thinking through it in the context of what we've been talking about, we're going to dramatically increase the supply of debt.

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the international market and at the same time, little things like this, relatively material things like this are going to decrease the demand. We all at least took economics 101. The price needs to go down, the yields need to go up to attract attention. If we're going to tax incrementally 5 % more of any kind of income that someone gets or capital gains that someone gets from buying American bonds, and we know that 30 plus percent of American debt is owned abroad.

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What is that? You're going to demand a higher yield by X percent to take that tax hit. All this to say, I think this comes back to the conversation we're having a few weeks ago when Trump was demanding Powell to lower rates. think they're staring down the barrel of this really long gun of they've got to refinance 30 % of GDP. They've got to finance their current budget bill, which has a lot of the campaign promises in it. They don't know quite else know how to lower the rates. You're seeing them throw a lot of different tactics.

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at the wall just trying to see what sticks and what might potentially lower rates. Yeah. No wonder we're all talking about arms so much, right? It doesn't seem likely that 30-year fix is going to get any cheaper anytime soon. So we do have to keep hoping that we have something like a recession or hopefully not a major calamity, but something that drives short-term rates lower so we can get at least cheaper money at five, seven years.

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There's two treasury auctions I'd suggest you keep an eye on, June 11th and 12th. There's some longer dated treasury auctions, I believe to 10, 20, 30 year sale. Just keep an eye on that June 11th 12th. See where those get auctioned off at as that's a good indication of where the banks are willing to buy it. Good call out there just to get an idea of what, again, what that demand looks like when there's major auctions. It's all about supply and demand, right? Keep an eye on that big, beautiful bill and what actually goes through and if anything gets revised there.

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in terms of the amount that we're spending, meaning supply side, and then some of these rules about taxes on foreign investors that's going to hurt the demand side. And then just generally with tariffs and global, know, de-globalization as a process right now, what is that going to do to longer term rates? That's what we should all be paying attention to. These are, I mean, as you said earlier in the show about tariffs, right? These aren't short term.

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I mean, these are kind of structural shifts we're looking at probably for the next several years, whether it's tariffs or what's in the big beautiful bill or just kind of general demand for US treasuries and de-globalization. In my mind, structural shifts like this have fundamentally changed our outlook. I don't see a decrease in 1 to 2 % in rates anytime soon because of that. Right.

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Yeah, as you said, not a short-term thing. This administration is looking to make its mark on the world and it's already in motion. And even if the next administration decides to reverse some of these things, that won't happen for six, seven years from now. So that goes back to your, tying it back, I keep tying it back to your thesis or maybe it was Logan's from Housing and Wire that you've stolen about, know, Trump does want to decrease interest rates, but he's got all these other policies that are fundamentally increasing long-term interest rates.

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So the only way he can decrease interest rates or get the Fed to decrease interest rates would be blowing up unemployment. Problems that need to be adjusted or cleaned up. Unemployment is one of those things that we don't seem to be very focused on right now, but somehow the private sector is just propping it up, but that's not going to last forever. And the government jobs, a lot of those have gone away already. So we'll see what that looks like. Honestly, the only silver lining

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we don't talk about much is energy. Energy prices have remained fairly steady or have dropped. that is, I think that's the reason the core PCE was different from another reason, right? Some of it was financial services, but some of what's been holding down inflation has been dropping energy prices. So we'll keep an eye on that. All right. Do we miss anything? Yeah. OPEC has increased supply recently. So that's certainly helping. And maybe that was partly due to Trump being in the Middle East recently and negotiations there. Yeah. By a lot.

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We're approaching like $60 a barrel for most mixes. think for the past two or three months, OPEC's been saying they're going to pump out an additional 400,000 barrels a day. So it's a lot of oil. Yeah. I mean, it's one of the big, historically one of the, if not the biggest driver of prices of everything. We may have to have a whole podcast on that. And I'm sure when the president goes to the Middle East, there are...

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There's on-camera conversations. There's also probably behind closed door conversations. Those are some of the countries that hold an enormous amount of our debt. As rates go up, that debt becomes worth less. There's a little bit of a, help us out a little bit here. Help us with inflation indirectly. That's going to potentially long-term help the value of your assets and just our general partnership. Cheap energy for the general consumer, but keep in mind those low...

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Dollars per barrel also impacts domestic oil. Sure, production and profits. They make a lot of money, but they do have a minimum cost per barrel they got to maintain. Although I'd imagine the OPEC drilling is in large part to put pressure on Iran. That was the main reason for Trump's Very true. Sanctions in Iran. put maximum pressure on them. Did we miss anything big? I don't think so. Covered a lot of bases today. All right, good, good. Let's wrap this thing up. Yeah, great discussion.

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Gentlemen, appreciate the insight. Appreciate rapping about it with you. Yeah, we'll be back next week and I'm sure everything will change just a little bit. Always does. All right. Thanks everybody. Thank you. All right. Let's close this thing out. Thanks so much, Alex and Jeff. Great conversation about rates. A lot to keep an eye on as we go forward. We let you know what you can watch, but we'll also keep you informed every week on this podcast as well. That's it for today.

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