A selling panic in major tech stocks driven by Chinese AI newcomer DeepSeek may provide modest relief for mortgage rates this week, after driving bond yields lower.
The tech-heavy Nasdaq composite closed down nearly 3% on Monday, with shares of AI-focused chipmaker Nvidia plunging 17% and shaving nearly $590 billion from the company’s market cap.
In the flight to safety, bond prices rose, driving yields on 10-year Treasury notes down nearly 10 basis points over the day. Bond yields move inversely to prices, and mortgage rates tend to follow long-term bond yields.
For homebuyers, it could mean modest relief on mortgage rates on new applications in the near term.
Rates on 30-year fixed home loans averaged 6.96% last week, according to Freddie Mac. Monday’s stock sell-off could drive that average slightly lower, and at a minimum should keep this week’s average from bouncing back above 7%.
“Mortgage rates, which are affected by factors that influence the 10-year, are likely to fall this week in the widely tracked Freddie Mac index,” says Realtor.com® Chief Economist Danielle Hale.
“Home shoppers who already have an offer accepted can take advantage of this reprieve, but I don’t expect it to mean lasting mortgage rate relief for home shoppers,” she adds. “That will come from broader economic stability and ongoing improvement in inflation.”
Why DeepSeek caused a stock sell-off
DeepSeek recently launched a free, open-source AI product called R1, which appears to rival the capabilities of ChatGPT-maker OpenAI’s recent models.
But the Chinese upstart claimed that R1 was built at a much lower cost of about $6 million, compared with the hundreds of billions invested by OpenAI and other U.S. leaders in generative AI.
DeepSeek was also created despite a U.S. export ban on the advanced chips that power AI products from OpenAI and its domestic competitors. However, the company appears to have legally obtained several thousand Nvidia chips before the latest version of the export controls took full effect.
Gaining prominence just days after President Donald Trump announced a new $500 billion AI infrastructure venture with OpenAI, Softbank, and Oracle, DeepSeek’s app raised fears that U.S. tech companies are wildly overspending on capital investments in AI, and are ripe for disruption.
The result was a sell-off, although the impact might be short-lived. Already, tech stocks were reversing some losses on Tuesday, with the Nasdaq rising 1.8% in midday trading.
Wedbush analyst Dan Ives called the sell-off a “buying opportunity,” dismissing DeepSeek’s claim of a $6 million startup budget as “likely a fictional story.”
What DeepSeek turmoil means for Fed rate cuts
Federal Reserve policymakers are set to announce their latest interest rate policy on Wednesday, with significant implications for mortgage rates.
Bond markets are pricing in a 99% chance that the Fed holds steady at its current policy rate of 4.25% to 4.5%.
If the Fed does leave its rate unchanged, it will mean little to mortgage rates. A surprise cut would send bond yields and mortgage rates lower, although that seems unlikely.
Thus, commentary from Fed Chair Jerome Powell and projections from other policymakers issued after the meeting have the biggest potential to move rates higher or lower.
The Fed rarely responds directly to stock market gyrations like the one seen on Monday, unless they reach cataclysmic levels likely to imminently disrupt the broader economy.
The central bank tends instead to focus on fundamental metrics such as economic growth, inflation, and job creation when making rate decisions.