Capital Markets Update
 

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Week of 6/8/26 - 6/15/26

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We learned Friday that the U.S. labor market significantly outperformed expectations in May, adding 172k jobs and extending the strongest three-month hiring streak in more than two years. This was even as consumer sentiment weakened and borrowing rose at its fastest consecutive pace since late 2022, amid higher energy costs and softer wage growth. Strength was concentrated in leisure and hospitality, alongside non-residential construction linked to AI infrastructure and defense spending, while upward revisions to prior months reinforced the view of sustained labor-market resilience and pushed Treasury yields higher as markets priced in a more hawkish Federal Reserve outlook and the growing likelihood of additional policy tightening by year-end.

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Beneath the headline data, markets are increasingly focused on whether the U.S. is settling into a structurally higher-rate regime, supported by resilient growth, persistent inflation pressures, and rising estimates of the neutral policy rate, all of which have helped keep real yields elevated despite episodic risk-off flows. Concurrently, geopolitical uncertainty (particularly related to Middle East tensions and oil supply risks) has become a dominant driver of rate volatility, often outweighing domestic data, while investors begin to reassess the implications of Fed leadership shifts and the broader evolution toward a “higher-for-longer” policy framework, leaving markets to grapple less with whether inflation persists and more with how much economic durability remains under sustained rate pressure.

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In the current environment (resurgent inflation, elevated geopolitical risk, and the potential for higher rates), Agency MBS investors may be better served emphasizing shorter-duration exposure without sacrificing cash flow. Fifteen-year agency mortgages stand out in that regard, offering prepayment speeds broadly comparable to 30-year pools while carrying significantly lower duration risk. Within the sector, Ginnie Mae 15-year securities appear particularly attractive, historically prepaying faster than both conventional 15-year and 30-year counterparts despite minimal contribution from buyouts, suggesting the advantage is driven by borrower characteristics rather than technical factors. While the sector’s relatively limited supply can make sourcing difficult, its combination of faster cash return, lower interest-rate sensitivity, and stronger underlying credit profiles make it a compelling defensive allocation for investors seeking shelter from a potentially more volatile rate environment.

The week’s focus is the May CPI and PPI reports, which are expected to show continued but moderating inflation pressures, with core CPI projected to rise around 2.9 percent year-over-year and headline inflation accelerating toward 4.2 percent amid an estimated 8 percent monthly jump in gasoline prices. Core readings are expected to remain relatively contained at roughly 0.2 percent month-over-month as tariff-related effects fade and geopolitical disruptions have yet to fully filter through to retail pricing, while shelter inflation is likely to normalize after prior data distortions. Coming on the heels of a stronger-than-expected jobs report, these data releases reinforce a narrative of resilient growth and sticky inflation, leaving markets increasingly convinced that the Fed will remain on hold in the near term with a growing bias toward the possibility of additional tightening rather than rate cuts later this year.

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With no real data of note on today’s economic calendar, save for May’s Consumer Inflation Expectations, we begin the week with Agency MBS prices roughly unchanged from Friday’s close, the 2-year yielding 4.15, and the 10-year yielding 4.54 after closing last week at 4.54 percent, up 9-basis points over the course of last week.

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Commentary by Rob Chrisman