Capital Markets Update
 

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Week of 10/12/26 - 10/19/26

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U.S. Treasuries and Agency MBS staged a modest price recovery at the end of last week after a sustained selloff pushed 10-, 20-, and 30-year yields to fresh 2026 highs. Strong demand at longer-dated Treasury auctions and three consecutive sessions of intraday rebounds suggest that selling momentum may be moderating.

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However, the rally appears more opportunistic than a confirmed trend reversal, as persistent inflation, geopolitical uncertainty, fiscal concerns, and a hawkish Federal Reserve continue to pressure bond prices lower. Markets have reduced the probability of an October rate hike to below 20 percent, despite Fed minutes signaling broad support for restrictive policy and the possibility of another increase in 2026. Inflation data released this week (CPI Wednesday, PPI Thursday) will be key in determining whether yields consolidate or resume their ascent, particularly given technically overbought conditions in the 10-year Treasury market and improving momentum indicators that suggest room for some near-term relief.

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This is a daily commentary about residential lending, and Agency MBS continue to face greater challenges than Treasuries, with elevated rate volatility, limited buyer demand, and widening spreads weighing on valuations and mortgage origination margins. Conventional 30-year MBS underperformed last week, with the FNCL current-coupon spread widening to 124-basis points over the 5-year/10-year Treasury blend, while 15-year securities outperformed as their spread tightened to 66-basis points. Mortgage rates rose to 7.40 percent, the primary-secondary spread widened to 92-basis points, and total mortgage applications declined 4.2 percent week-over-week, reflecting continued affordability and demand pressures.

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Commentary by Rob Chrisman