Capital Markets Wrap – August 14, 2026

Slowing growth, improving (but still elevated) inflation, and a widening divergence between the front and long ends of the Treasury curve. Inflation at the wholesale level in July was softer than expected: headline PPI was unchanged month-over-month and core PPI up just 0.2 percent. Both measures eased year-over-year. Combined with a CPI report showing modest disinflation, this reduces the urgency for the Fed to tighten policy. Retail sales also disappointed, falling 0.6 percent in July versus expectations for a 0.2 percent increase, reinforcing the argument for patience. Markets have responded accordingly, with the implied probability of a September 25-basis point hike falling from above 45 percent at the beginning of the week to below 35 currently, and the front end of the curve showing the clearest momentum toward lower yields.

While weaker economic data have supported the front end, the long end remains stubbornly elevated, reflecting concerns about persistent inflation, oil and geopolitical risks, and the government’s rapidly expanding financing needs. The Treasury’s $25 billion 30-year auction cleared at 5.22 percent, the highest rate since 2001, while the 10-year auction also produced its highest financing cost since 2007. The $432 billion July deficit further reveals the massive scale of Treasury supply. Consequently, the 2s/10s curve (and more broadly, the persistent steepness of the curve) may be more informative than any individual yield level: the front end is increasingly pricing out a September hike, while the long end is demanding considerably more evidence before participating in the rally. For Agency MBS, this environment has been constructive but volatile, with attractive spreads, declining volatility, and resilient prepayment expectations supporting performance, particularly in longer-duration Fannie Mae coupons, Ginnie Mae 30-years, and Fannie Mae 15-years.

Housing seems to be cooling in an orderly fashion, with low turnover, constrained affordability, slowing home-price appreciation, and record mortgage debt levels, while elevated debt-to-income ratios arguably provide a more useful measure of borrower risk than LTV alone. Ginnie Mae delinquencies deserve particular attention: 90+ day delinquencies in Ginnie Mae II 30-year pools have reached roughly 3.9 percent, driven primarily by FHA, where severe delinquencies are 5.3 percent (more than four times the pre-Covid average) versus 1.8 percent for VA and only 1.3 percent for conventional mortgages across all delinquency stages. However, moderating roll rates suggest deterioration is a risk to monitor rather than a crisis, reinforcing the importance of underwriting discipline and borrower credit quality even as substantial homeowner equity provides a meaningful cushion.

The big takeaway from conferences this week was that non-Agency lending is moving further into the mainstream. Modern non-QM increasingly serves financially healthy borrowers whose income or assets do not fit neatly into Agency guidelines (particularly self-employed borrowers, investors, and households with complex tax situations) rather than functioning primarily as a repository for damaged credit as it did before the financial crisis. Strong performance, risk retention, lender capital at risk, improved automation, and a growing self-employed workforce have expanded the addressable market, while bank-statement HELOCs and closed-end seconds provide additional ways for homeowners to tap substantial equity without refinancing attractive first liens. With estimated non-QM originations of $150–$200 billion and securitizations of $80–$85 billion this year, tighter credit spreads and growing investor demand suggest that non-Agency execution is increasingly a value-optimization tool, not merely an alternative for loans that cannot qualify for Agency delivery.

Stop trying to predict rates, and focus more on allocating capital and execution intelligently amid uncertainty. Agency MBS supply remains robust, July gross issuance of $110.9 billion extended a 25-month streak of year-over-year supply growth. Muted prepayments, with Fannie 30-year CPR at just 8.1 percent and only about 3.6 percent of borrowers retaining refinance incentive, continue to favor servicing and specified pools but are dampening prospects for a broad refinance-driven origination recovery. In the current environment, secondary-market advantage increasingly comes from understanding which investor values a particular loan or pool most, balancing specified-pool payups against hedge and rate-sheet economics, and recognizing that an apparent price advantage can disappear quickly. Technology and better data can improve analysis, but they cannot eliminate uncertainty. The durable competitive edge remains discipline, liquidity, governance, and the ability to distinguish information from insight when borrower behavior, rates, prepayments, credit, and market technicals all interact unpredictably.