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Capital Markets Update
Week of 9/7/26 - 9/14/26
With mortgage rates still elevated and prepayment risk muted, investors are favoring longer-duration exposure lower in the coupon stack. GSE and bank demand for Agency MBS has slowed, despite August Agency MBS supply rising to $116 billion, up 4.6 percent from July and 5 percent year-over-year, but the increase was largely seasonal rather than a sign of renewed refinancing activity, with higher mortgage rates pushing refinance-driven issuance to its lowest share in a year while purchase volumes remained relatively stable. Keep in mind that September is historically the weakest month for MBS performance; the preferred strategy remains capital preservation, low-payup pools, and a short-duration posture.
MBS loan production was up 3.3 percent from August 2025, with Ginnie Mae production particularly strong. Conventional 30-year UMBS issuance jumped 13 percent month-over-month in August and shifted decisively toward higher coupons as borrowers’ rates remained around 6.7 percent overall. For mortgage-backed securities, the resulting slowdown in prepayments is extending aggregate MBS duration to a year-to-date high of 5.75 years, increasing sensitivity to further rate moves. That more than 96 percent of borrowers have no refinancing incentive also improves convexity and limits near-term prepayment risk. Shorter-duration securities, such as Fannie Mae 15-years, may therefore offer relative protection if rates remain elevated. The supply mix is moving up in coupon and increasingly reflecting purchase activity rather than refinance-driven turnover.
MSR valuation and MSR risk are related, but traditional rate and spread factors explain relatively little of current bulk valuation levels. They do remain effective at explaining month-to-month price movements, meaning uncertainty about an asset’s value does not necessarily make it difficult to hedge. For portfolio construction and stress testing, historical lookbacks can provide valuable understanding of how MSRs behave when rates, curves, mortgage spreads, and liquidity shift simultaneously, while also defining the range of outcomes that forward-looking models may miss. Rather than relying on a single multiple, duration, or convexity estimate, effective MSR risk management requires comparing forward-looking models with long-term realized behavior, recognizing where they diverge, and building hedges that remain directionally sound across changing market cycles.
In terms of news impacting mortgage rates, Fed Governor Waller said yesterday that he would vote to hold the fed funds rate range steady at the FOMC meeting later this month if there are no negative surprises in upcoming data. So, let’s review some data. August data showed services activity accelerated, with ISM Services PMI rising to 55.4 percent and S&P Global’s final reading reaching 56.5, but persistently elevated input costs raise the risk of continued price pass-through and inflation. The wider-than-expected $88.6 billion trade deficit is likely to weigh on Q3 GDP growth, although a downward revision in unit labor-cost growth to 1.2 percent bodes well for inflation relief.
The labor market also remains relatively healthy, with initial claims at just 206k signaling continued low layoffs. While growth is holding up, sticky service-sector costs could make it harder for the Fed to ease policy aggressively. After The ADP Employment Change report pointed to the addition of 38k nonfarm payrolls in August (versus 47k expectations) today’s payrolls report is likely to set the stage rather than determine the Fed’s September 16 decision, with August CPI and PPI ultimately carrying the most weight in determining whether policymakers deliver a “hawkish hold” or hike rates.
Today brings the all-important August jobs report. Nonfarm Payrolls were +162k versus expectations of +45k in August after a -23k reading in July. The unemployment rate was 4.1 percent, unchanged as expected. With the Fed increasingly focused on the stability of the labor market rather than weak headline job growth, the strong jobs numbers are pushing the narrative for a rate increase by the Fed, leaving the inflation data as the determining factor of whether underlying price pressures have eased enough to justify holding rates or instead force the Fed to tighten later this month. After the strong employment news Agency MBS prices are worse .125-.250 versus Thursday’s close, the 2-year is yielding 4.41, and the 10-year yielding 4.79 after closing yesterday at 4.76 percent: the yield curve is flattening.
Commentary by Rob Chrisman