As Promised, Inflation Data Creates Rate Volatility, But Not Like You'd Expect

Ask anyone who knows a thing or two about how interest rates work and they'll tell you: inflation is the enemy!  What caused the record high rates back in the 70s/80s?  Record high inflation!  What pushed rates higher at the fastest pace since the 80s over the last 6 months?  Same old story...

If you think about inflation and rates, it makes sense.  Rates are based on bonds.  Bonds are a "fixed income" investment, meaning the buyer/investor agrees to receive payments over time on a fixed set of terms upfront.  In other words, if I'm a bond investor (same thing as a mortgage lender), I'm coughing up a big chunk of cash upfront (let's call it $100k for the sake of an example) and you will pay me $500/month for however many years. 

Now consider the same example but with a ton of inflation.  Your $500 USED TO buy me a certain amount of "stuff."  Now, after the inflation, that same "stuff" costs me $750.  In not so many words, when this scenario plays out in the financial market, lenders/investors effectively raise rates such that the payment is closer to $750.  Granted, these numbers are purely illustrative, but you get the idea.

Enter today's inflation data which said prices rose even faster than initially anticipated in the month of June.  When the same thing happened last month, rates spiked abruptly.  It LOOKED like they would do the same today (and indeed, that was the expectation).  But roughly 2 hours after the data, bonds turned around and actually moved back into STRONGER territory on the day.   In turn, most mortgage lenders were able to bring rates back in the vicinity of yesterday's levels after beginning the day higher.

As for explanations for the paradoxical movement, those would require another article unto themselves, but the short version of the best guesses is that the market increasingly sees inflation (and the Fed's necessary policy response) as resulting in recession.  Recession is one of the things that can tamp down the demand side of the economy enough to help defeat runaway inflation.