Treasury yields are rising and investors increasingly demand compensation for inflation, geopolitical risk, and massive government borrowing needs. The U.S. 10-year Treasury yield has reached roughly 4.8 percent, the highest since early 2025, while the 30-year remains near two-decade highs. Global bond markets face similar pressures from expanding deficits, persistent inflation, and heavy corporate borrowing tied to the AI investment boom. The U.S. debt burden has now surpassed $40 trillion, and renewed U.S.-Iran hostilities have pushed Brent crude above $90 per barrel, adding another potential source of inflation that could keep central banks restrictive. Markets are consequently pricing roughly a 70 percent probability of a September Fed hike, reflecting growing skepticism that rates can decline meaningfully without clearer evidence that inflation is under control.
The Fed’s policy dilemma is defined by the tension between resilient economic activity and persistent price pressures. August data showed services activity accelerating, while the Beige Book characterized overall growth as modest but supported by data-center and defense demand; the labor market, meanwhile, remains relatively stable despite signs of slower hiring. Initial claims remain low at 206k, and the August jobs report subsequently showed a surprisingly strong 162k payroll gain with unemployment steady at 4.1 percent, strengthening the case for Fed restraint. Although lower unit labor costs provide some inflation relief and the widening trade deficit could weigh on Q3 GDP, sticky service-sector prices and higher energy costs leave policymakers little room to ease the fed funds rate. However, upcoming CPI and PPI data may ultimately matter more than any employment report in determining whether September brings a “hawkish hold” or another hike.
August Agency MBS supply rose to $116 billion, but the increase was largely seasonal rather than evidence of a refinancing resurgence, with refinance-driven issuance at a one-year low and purchase activity relatively stable. More than 96 percent of borrowers have no economic incentive to refinance, pushing aggregate MBS duration to a year-to-date high of 5.75 years and increasing sensitivity to further rate increases. Investors are therefore favoring longer-duration exposure lower in the coupon stack, while the more defensive strategy remains capital preservation, low-payup pools, and shorter-duration securities (e.g., Fannie Mae 15-years, particularly since September is historically a weak month for MBS performance). Meanwhile, conventional 30-year UMBS issuance rose 13 percent month-over-month and shifted toward higher coupons; the supply mix increasingly reflects purchase borrowers rather than refinance turnover.
Mortgage production itself is not collapsing, however, with MBS loan production up 3.3 percent year-over-year and Ginnie Mae particularly strong, even as mortgage applications rose only modestly and refinancing remained 19 percent below last year. Are existing Agency guidelines keeping pace with changing borrowers, incomes, properties, and loan scenarios? Despite legitimate criticism, Fannie Mae and Freddie Mac remain central to U.S. housing finance and continue to generate substantial earnings, with second-quarter net income of $4.0 billion and $3.8 billion, respectively.
Fun times out there: duration risk, policy uncertainty, and a structural shortage of catalysts for lower rates rather than by a traditional refinancing cycle. Stronger-than-expected employment, sticky inflation, rising energy prices, global bond-market weakness, and the fiscal burden of enormous government borrowing all argue for caution, while muted prepayments make MBS and MSR portfolios more exposed to rate volatility. The most prudent positioning therefore favors liquidity, disciplined duration management, careful MBS security selection, and MSR hedges that are strong across different rates and spreads rather than optimized to a single relationship. Put another way, until inflation convincingly breaks lower or the labor market deteriorates enough to force the Fed’s hand, the path of least resistance for mortgage rates remains higher and more volatile.
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