Why Are Mortgage Rates Rising Since The Fed Rate Cut? Blame Offshore Crypto Trading.

Mortgage Rates Have Risen Sharply Since The 50 Basis Point Cut In September
GOP Economic Policy Centerpiece Are Tariffs Which Are Inflationary
Polymarket Offshore Trading Has Been Manipulated And Consider As Basis For GOP Win

What? Many in real estate have been scratching their heads a lot lately. The Fed implemented a 50 basis point rate cut in mid-September yet mortgage rates have risen for five consecutive weeks. While the employment and wage picture continues to impress, the mortgage rate growth makes no sense until we look at it in the context of the presidential election that is coming down to its final days. The economic plan by Harris emphasizes spending tax dollars to enable economic growth for the middle and working class but could risk raising inflation as the Federal government continues to spend. Trump wants to implement tariffs across the economy which will cause significant inflation.

I’m not trying not to get political here but I thought I’d share my theory of why mortgage rates are moving higher aside from the economy remaining stronger than has been anticipated in the context of employment and wages. In offshore markets such as Polymarket, betting on a Trump win has gained traction in the past month despite the polls showing a dead heat or at least the spread between the candidates is within the margin of error.

Prediction markets in politics often fail. My friend Barry Ritholtz wrote about this a while back, a bunch of times.

I sometimes think of the political futures markets as a focus group unto themselves. Here’s where things get really interesting: When the group is something less representative of the target market, they get it wrong with alarming frequency. Indeed, the closer the traders are as a group to the target decision makers/voters, the better their track record.

About one-third of the trades on Peter Thiel’s Polymarket are manipulative trades. This offshore betting site based on crypto is used regularly to report a sign of the voter’s move toward Trump (and therefore his economic policy of across-the-board tariffs). Bloomberg has a very cool graphic that shows how just a few big bets can easily skew market odds:

As Barry said back in 2007 on the prediction markets accuracy:

Where prediction markets excel is in acting as a collective real time polling mechanism for their participants. The closer the collective group is to the broader population, the more accurate these markets tend to be. Where they do poorly is when the collective attempt to “pool their ignorance” and forecast the random or the unknowable.

It looks like the markets are easily gamed by a small number of bettors and are therefore the markets are wrong a lot. And with that the perception that the party in the lead is going to drive economic policy – in this case, lots of tariffs and the resulting jump in inflation. We saw this in 2018 when the China tariffs implemented caused retaliatory tariffs on the U.S., costing farmers about $27 billion. This time tariffs are said to be implemented across the economy which would result in significant inflation. This would lead to higher mortgage rates.

More than $100 million has been bet in Polymarket on the presidential race. The majority of that betting comes from only four accounts controlled by one person:

The odds on Polymarket began favoring him this month after just four accounts, with user names like Fredi9999 and PrincessCaro, bet more than $30 million on a Trump victory, according to an analysis of transaction records by Chaos Labs, a crypto data provider. Polymarket said on Thursday that all four accounts were controlled by one person, whom it described as a French national with a financial services background, without revealing the person’s identity.

Final Thoughts

In my recent speaking at various public events, I thought it was interesting that no one was talking about the rise in mortgage rates over the past month. The 30-year fixed moved from just above 6% to just below 7% despite the 50 basis point rate cut in September. While part of this can be explained away with a stronger employment and wage picture, it doesn’t seem like enough. Manipulation of trading markets made more sense to me. And it’s not just Polymarkets. Kalshi shows a similar pattern in the election.

Polymarket pivoted sharply to Trump in October, significantly manipulated by a small pool of bettors
The pivot has been widely covered
Trump’s economic policy centerpiece is largely based on inflationary tariffs
The strong employment and wage sector coupled with a pivot to future inflationary policy pushes mortgage rates higher
If Trump loses on Tuesday, mortgage rates have the potential to fall with the removal of significant inflation risk

It’s just a theory, but it seems logical to me. Please share your thoughts and I’ll anonymously share your feedback on Monday.

And remember this.