Capital Markets Wrap – October 30, 2026

Treasuries have rallied nearly 50 basis points in October as AI-driven equity volatility revived safe-haven demand and reinforced expectations that early-October yield highs marked a potential peak. Freddie Mac and Fannie Mae remain central to the housing finance system even as non-Agency lending captures a growing share of the market. Both government-sponsored enterprises (GSEs) have experienced layoffs, creating uncertainty for employees, while continuing to generate billions in earnings and pursue initiatives that could influence lenders, servicers, and investors across the industry. Freddie Mac’s third-quarter 2026 results demonstrate its financial strength: net income rose 17 percent year over year to $3.2 billion, net revenues increased 19 percent to $6.8 billion, and net worth reached $81 billion as of September 30. Yet strong financial performance exists alongside a challenging housing market, heightened political scrutiny, and questions about the future direction of government-supported mortgage finance. Recent layoffs, an executive order targeting housing affordability, and potential changes to refinancing rules illustrate why developments at the Agencies matter well beyond their immediate market share.

With inflation still elevated, economic activity resilient, and oil prices adding uncertainty, investors are weighing the high probability of a December rate increase from the Federal Reserve (after no change to the fed funds rate this week) against risks to employment, credit conditions, and economic growth. Bond yields are being pulled in all (read: mostly upward) directions from inflation concerns, fiscal deficits, geopolitical tensions, and increasingly hawkish global central banks, while technology-sector credit risks and concerns about AI-related valuations have periodically encouraged safe-haven buying. Fed Chair Warsh’s preference for meeting-by-meeting decisions and limited forward guidance has added uncertainty, leaving investors to interpret economic releases, voting dissents (we had two this past meeting), and policy language for clues about the next move. Beyond interest rates, the Fed’s longer-term balance-sheet strategy could prove equally consequential. Its Agency mortgage-backed securities portfolio has declined from a peak of $2.7 trillion in March 2022 to approximately $1.89 trillion, and a gradual transition toward an all-Treasury portfolio could take years. Continued runoff may affect mortgage spreads and liquidity even without active MBS sales. The Fed can change the price of money through rate policy, or change its availability through balance-sheet management.

Lower home prices and occasional bond-market rallies have not resolved the affordability problem. Pending home sales fell 7.3 percent in September, housing starts declined 5.2 percent, builder confidence reached its lowest level since 2012, and new home sales and purchase applications remained under pressure. Although mortgage applications rose 3.4 percent for the week ending October 23, purchase applications were still 18 percent below year-ago levels, while refinancing applications were down 61 percent. Mortgage rates also have not consistently benefited from Treasury rallies because Agency MBS spreads can widen even as benchmark yields decline. In this environment, lenders must manage pipeline hedging, fallout, lock renegotiations, and increasingly competitive pricing. Independent mortgage banks may need to cap loan-origination compensation or reduce fees to compete with credit unions and depository banks, particularly in the jumbo market, where a one-point origination charge on a $2 million loan amounts to $20,000. Adjustable-rate mortgages and other bank offerings can provide meaningful competition, while borrowers facing financial pressure may pursue cash-out refinancing despite unattractive rates. With homeowners holding approximately $36 trillion in equity, including $12 trillion considered tappable, cash-out transactions remain an important source of mortgage activity, and a reminder that prepayments depend on borrowers’ liquidity needs as well as interest-rate incentives.

President Trump’s executive order seeks to make the GSE title-waiver program permanent and directs the Federal Housing Finance Agency to consider further refinancing relief, including appraisal and income-verification waivers, potential loan-level price adjustment reductions, and proactive mortgage insurance cancellation pilots. These initiatives could reduce transaction costs and make refinancing more accessible, but their implementation and ultimate effect remain uncertain. For investors, easier refinancing can accelerate prepayments and increase negative-convexity risk, even when prevailing rates make traditional rate-and-term refinancing unattractive. Cash-out refinances deserve particular attention in discount MBS pools because financially pressured borrowers may extract equity despite receiving a higher rate. Loans seasoned for at least 12 months, with current loan-to-value ratios comfortably below 80 percent and lower borrower FICO scores, can warrant closer scrutiny for this behavior. Meanwhile, Agency MBS valuations have demonstrated recent strong excess returns and relatively attractive spreads in conventional and Ginnie Mae 30-year securities, particularly seasoned mid-coupon pools.

For lenders, the priority is to preserve margins without sacrificing borrower relationships; for investors, it is to distinguish temporary market rallies from durable improvements in fundamentals; and for borrowers, it is to understand that opportunities may exist even in a difficult market, provided they evaluate the full cost and risks of available financing. The mortgage industry may indeed be moving toward acceptance of a smaller, more competitive market, but success will depend on adapting to structural changes rather than waiting for interest rates alone to restore the conditions of years past.