Continued Iran conflict raises mortgage rate risk into late 2026

The conflict with Iran continues to be a threat to

Mortgage rates between 5.75% and 6.75%

The 10-year yield fluctuating between 3.80% and 4.60%

Now, my higher rates and bond market forecasts in 2026 were based on a premise that if the labor data improved and inflation stayed firm, it would be reasonable for the 10-year to stay in the upper range between 4.30%-4.60% and mortgage rates to be between 6.375%-6.75%.

However, clearly, the Iranian conflict has changed the ball game altogether, because I didn’t have the labor data improving, a conflict in the Middle East pushing energy prices up or the U.S. dollar heading higher. So, what if this conflict lasts until after the midterms?

10-year yield and the Iran conflict

The Iran conflict has been going on However, the labor data has improved enough this year to show that the labor market wasn’t breaking in 2025 but hit a soft patch during a crazy year when we had Godzilla tariffs, government shutdowns, firing of government workers and canceled funding for certain programs.

I wrote about the jobs report and what has changed recently in The risk with higher energy costs and high short- and long-term rates is that they can further slow growth going into 2027. If the Fed sees any evidence of growth and a weakening in the labor market, look for their verbiage to change. But for now and over the next five to six months, look for more of a hawkish Fed — and that will only get worse if the conflict doesn’t end soon.

What happens next

If the conflict continues for another five to six months, there are so many scenarios that could happen. If the economy outperforms and inflation worsens, higher mortgage rates, peaking at 0.435% above 6.75%, might not be high enough. However, if the economy and the stock market do worse over the next five to six months, then that peak level should hold because spreads are better. The reality is that mortgage spreads have been the Let’s compare last week’s mortgage rates to where they would have been over the last three years, given the 10-year yield’s current level:

• If we had the worst mortgage spread levels of 2023, mortgage rates would be 7.76% today, not 6.66%.
• If we had the worst levels of 2024, mortgage rates would be 7.38% today 
• If we had the worst levels of 2025, mortgage rates would be 7.19% today.

Conclusion

The Iran conflict lasting another five to six months isn’t my base case because that is a lot of pain for Iran and the world, which might get NATO, China and others to be more aggressive in finding a solution. So, for now, I am sticking with the original premise that if the conflict lasts longer but not past July 4, the labor data improvement could add 0.375%-0.435% to the peak forecast of 6.75% I had for 2026.

At the end of May, when it looked like we had some resolution, I wrote