(508) 963-7507
Capital Markets Update
Week of 8/17/26 - 8/24/26
The big takeaway from last week is that inflation is stabilizing rather than reaccelerating, which strengthens the case for the Fed to remain on hold and retain a wait-and-see approach at the Federal Open Market Committee meeting next month. Were you expecting a rate hike anyway when inflation isn’t accelerating, the labor market is deteriorating, and retail sales (even without adjusting for inflation) are now printing negative? Agency MBS and Treasuries sold off to close last week as investors shrugged off weak July retail sales. Longer-duration bonds underperformed even as the 2-year yield briefly fell to its lowest level since late June, reflecting the gap between expectations for Fed easing and continued pressure on the long end of the yield curve.
U.S. retail sales fell in July by the most in more than a year as consumers pulled back on purchases at online stores and auto dealers. The retail purchases, which aren’t adjusted for inflation, decreased 0.6 percent, the most since May 2025, according to the Trump administration. The University of Michigan’s preliminary August consumer sentiment index fell sharply in July. Only 8 percent of consumers expect their incomes to outpace inflation over the next year, signaling growing pressure on household purchasing power that could translate into weaker discretionary spending.
“Ability to Repay” requirements help mortgage performance, right? For people wondering why mortgage rates aren’t even higher, considering the 10-year Treasury yield is at its highest level in nearly three years, the answer is that the mortgage–Treasury spread has compressed meaningfully. The spread is composed of prepayment and credit risk. Unlike in 2023, when elevated rate volatility, weak MBS demand and Fed balance-sheet runoff pushed mortgage spreads unusually wide, today investors are demanding less of a premium to hold mortgage-backed securities. Yes, the 10-year yield is high, but the “extra” spread added on top of it to price a mortgage has fallen substantially, helping keep mortgage rates around 6.6 percent to 6.7 percent despite the 10-year approaching 4.7 percent.
President Trump is pitching a “golden age” economy, but voters remain focused on the more immediate reality of elevated living costs and inflation, creating a gap between the administration’s economic narrative and how households feel. With the midterms approaching, the White House appears poised to roll out additional measures, including potential capital-gains reforms that could both index gains for inflation and substantially increase the tax exemption on home sales. Both have the potential to unlock housing inventory by giving long-time homeowners more incentive to sell.
But because meaningful changes would require congressional action, these proposals are still more campaign promise than policy, and there is an ironic near-term risk: simply signaling a future tax break could cause would-be sellers to wait, further constraining housing supply in an already tight market.
This week is lighter on the domestic data front, with focus on Wednesday’s FOMC minutes. The minutes will likely reiterate that most policymakers remain patient on adjusting rates due to a softer labor market and inflation data since the July meeting. Tomorrow, July housing starts are expected to edge lower, reflecting ongoing pressure from weak affordability and a challenging environment for builders. Today’s economic calendar kicked off with August’s Empire State Manufacturing Index. Later today brings the August NAHB Housing Market Index, and some short-duration Treasury auctions. We begin the week with Agency MBS prices little changed from Friday, the 2-year yielding 4.16, and the 10-year yielding 4.70, unchanged from Friday’s close.
Commentary by Rob Chrisman
