Capital Markets Recap – August 28, 2026

July data showed PCE inflation at 3.7 percent year-over-year and core PCE at 3.3 percent. Stronger consumer spending and durable-goods orders validated that growth remains firm; however, weaker consumer confidence, a 10.5 percent decline in July new-home sales, and softer housing activity suggest the economy is beginning to cool. Falling oil prices and easing U.S.-Iran tensions have reduced near-term inflation concerns, but the 10-year Treasury yield remains above 4.65 percent, leaving markets focused on whether slowing growth or persistent inflation ultimately drives Fed policy.

Fed Chair Warsh’s Jackson Hole speech is today, and investors will be looking for clarity on the Fed’s commitment to restoring 2 percent inflation, its communications strategy, balance-sheet policy, and the broader policy outlook. A hawkish message could trigger a sharp repricing, while dovish guidance might initially support bonds but ultimately pressure the long end if markets interpret it as increasing inflation or policy uncertainty. The Treasury’s auctions have been generally solid; the $44 billion 7-year sale attracted a high bid-to-cover ratio, but weaker indirect participation and elevated yields reveal the continued challenge of financing substantial government borrowing.

Treasury buybacks are providing a policy backstop, but they are unlikely to solve the structural problem facing long-term rates. Bessent’s expanded purchases of 10- to 30-year securities have narrowed long-end swap spreads, supported bond futures, and helped ease yields, but the Treasury is maintaining its regular auction schedule while buying back only a small fraction of the enormous outstanding long-duration debt stock. With roughly $31.5 trillion of Treasuries outstanding, persistent deficits, heavy issuance, inflation risks, and relatively strong growth remain powerful forces against sustainably lower long-term yields. Put another way, buybacks may improve liquidity and temporarily influence positioning, but the next major bond-market move is more likely to be determined by the interaction of growth, inflation, risk assets, Fed policy, and investor confidence in U.S. fiscal sustainability.

Higher mortgage rates are weakening demand even as home prices remain relatively firm. Mortgage applications fell 1 percent last week as the 30-year mortgage rate reached 6.78 percent, with refinancing activity particularly weak, while new-home sales and consumer confidence also deteriorated; yet limited housing supply, migration, income growth, and regional differences are preventing a broad-based collapse in prices. This is creating a more bifurcated housing market in which ownership remains viable in markets where incomes and supply support the monthly payment, while high land costs and regulatory constraints keep many households in the rental market. For policymakers and lenders, affordability increasingly depends on the monthly payment and structural supply-and-income dynamics, not simply home prices, down payments, or short-term financial interventions.