It was a great week for fans of chaos, volatility, and low interest rates as all 3 were delivered in spades. Despite the presence of several big ticket economic reports, the catalyst was Wednesday afternoon's tariff announcement followed by the international response on Thursday night.

For the most part, the market has been responding to tariff news by selling stocks and buying bonds. Because mortgage rates are based on bonds and because rates fall when demand for bonds increases, this has also meant lower mortgage rates. A common market jargon term for this phenomenon is "flight to safety."

It's not just US tariffs that made the news these week, even if they were the catalyst for what followed.  Early Friday morning, China announced retaliatory tariffs on the U.S. thus making investors even more concerned about the global economy and further fueling the flight to safety.  This can be seen in the following chart showing stock prices and bond yields (which correlate with mortgage rates).

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To get a sense of how big of a deal this has been for markets this week, consider the S&P 500's most often-cited volatility metric, the VIX:

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Part of the reaction in the interest rate market was based on the implication for Fed policy. Specifically, traders quickly began betting on a higher probability of deeper Fed rate cuts in 2025. That shift can be seen in the following chart of the market's expected Fed Funds Rate after the June meeting.

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The chart above also helps us reconcile a frustrating Friday afternoon, in which interest rates started out much lower than they ended up. Even without this knowledge, the important thing to focus on is the bigger picture. The average daily mortgage rate just fell to its lowest level since early October, 2024, even after accounting for Friday afternoon's modest reversal.

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Given the precipitous nature of this market movement and the fact that tariffs can change far more quickly than the typical interest rate motivations, it goes without saying that long-term lows should not be taken for granted.  While rates could remain here or even move lower under the right circumstances, there is also a risk of a rapid rebound. 

Ultimately, though, it won't be tariffs that dictate longer-term rate momentum. It will be the actual economic fallout (or lack thereof). This week's volatility is just the market's way of letting us know that it's worried about tariffs' impact on the economy.