A little less conversation
The pain train arrived on Wednesday morning, following the robust S&P Global U.S. manufacturing and services Purchasing Managers’ Index (PMI) report. The 10-year Treasury yield rose from 4.99% to 5.13% after the report’s release, then reached an eye-watering high of 5.23% on Friday, before closing at 5.17%. September saw an improvement in business activity that was “the greatest recorded since early 2015 [outside the post-pandemic reopening of the economy],” according to Chris Williamson, chief business economist at S&P Global Market Intelligence.
Before the S&P report, much of the market-related conversation centered on inflation, growth, war-related stresses, and fiscal largesse in the context of monetary policy. With the new data forcing the issue, however, the bond market conjured up Elvis Presley last week—and, like “The King,” demanded, “a little less conversation, a little more action.”
According to S&P Global, the September service provider activity index increased to 58.7 (versus 55.8 anticipated and 56.5 prior), the highest level since 2021. The service employment subindex was also the strongest since June 2022. The manufacturing gauge rose to 57.0 (versus 53.7 expected and 53.9 prior), its best reading since 2022. New orders, a key indicator of capacity utilization and future business growth, registered the fastest expansion since April 2022. And manufacturing hiring was the strongest since February 2021.
S&P Global also reported unusually severe supply-chain bottlenecks, persistent difficulty finding qualified workers, and sharply rising backlogs. Those constraints are increasing companies’ pricing power at the same time that higher oil prices have pushed fuel and transportation costs sharply higher, driving input-cost inflation to a four-year high. Taken together, the data suggest that strong demand is outweighing the drag from higher energy costs and supply-chain disruptions related to the Iran war, while reinforcing upside risks to inflation. America’s economic resilience has been impressive in 2026 and has picked up further over the last two months. According to the Citi Economic Surprise Index (CESI), economic indicators have surprised to the upside for nearly the entire year and have outperformed at an increased pace since August. CESI tracks actual data releases relative to consensus expectations: A positive reading indicates a beat on expectations, while a negative reading indicates data worse than expected. While CESI spent some time disappointing in 2025 (accompanied by rate-cut expectations), it has been positive for nearly all of 2026 and is supporting the hawks (Figure 1).
Mortgage professionals may grimace at the prospect of additional rate hikes, but the recent resilience in economic activity suggests that the economy can withstand renewed tightening in the near term. Federal Reserve officials appear to be moving toward a similar conclusion. Indeed, September’s Summary of Economic Projections provides additional evidence of the Federal Open Market Committee’s (FOMC’s) outlook: No participant judged the risks to GDP growth as tilted to the downside, while the four officials who held that view in June shifted to a more balanced assessment (Figure 2). This, in turn, suggests that policymakers see less risk that further monetary restraint will undermine growth.
Such confidence is also notable because the labor market and consumer outlook remain uneven. Monthly payroll gains were only 31,000 in June and 21,000 in July, before rebounding to 162,000 in August. Over the same period, the Conference Board’s Consumer Confidence Index declined from 92.2 to 90.2 to 89.4, extending a nearly uninterrupted slide that began in summer 2025.
The Fed, therefore, appears to be placing greater weight on resilient aggregate demand and persistent inflation than on softer pockets of the labor market and household sentiment. Consistent with that view, no FOMC participant assessed the risks to the inflation outlook as tilted to the downside (Figure 3). Instead, the distribution of views indicates a strong and increasingly broad judgment that inflation risks remain tilted to the upside (Figure 4).
While some of the headline economics are positive and are beating the consensus forecast, the numbers are nevertheless slowing. A risk is that the policy debate reinforces the bias toward further tightening, and hawkish rhetoric did increase last week. For example:
- Chicago Fed President Austan Goolsbee said, “We’ve been getting a little more sense … that some of [the inflation] maybe is coming from overheating demand—and the services inflation, maybe, isn’t going away.” Goolsbee added, “If the through line is that it’s coming from overheating demand, I think the implication is the rate response is more aggressive and more frontloaded than if it’s coming from supply shocks.”
- St. Louis Fed President Alberto Musalem said, “Both persistent demand and recurring supply forces
are continuing to contribute to keeping inflation risks elevated. And I judge that without further policy restraint on inflation, it is more likely to be substantially above our 2% target in 18 months than at target.” - Philadelphia Fed President Anna Paulson said, “Looking ahead, if conditions evolve as I expect, some modest further tightening may be warranted.” Paulson, an FOMC voter this year, added that such a move was needed because core inflation remains “stubbornly elevated … This recalibration brings policy closer to what I believe is needed to return inflation to 2%, at a pace that balances inflation with risks to the labor market.”
Markets are, accordingly, heeding the remarks of policymakers and are pricing in additional rate hikes this year and next. It thus seems highly probable that at least one more rate hike will be delivered in 2026; market expectations now include three additional 25-basis-point hikes (Figure 5).
Strong consumer spending, AI-fueled business investment, and defense outlays have bolstered U.S. businesses this year. Confidence seems rather high, albeit waning. Perhaps most importantly, Fed officials also seem to have drunk the Kool-Aid of positivity. The Treasury movement has been parabolic and has reached oversold territory from a technical perspective.
The economics and macro narrative will, of course, ultimately guide Treasury yields. But, as Elvis might say, “all this aggravation ain’t satisfactioning me.”
FROM THE DESK
Agency CMBS — The 10-year Treasury yield blew through the 5% psychological mark and the yield curve flattened to a low of 20 bps—marked as the spread between 10- and two-year government yields. These factors (both the level and speed) have caused spreads to widen in both Ginnie and Fannie products. While some buydowns are still being bid, investors are trying to maintain floors at note rates of 5.50% to 5.75%, though that can change quickly.
Municipals — Municipal bond market conditions weakened further this week, as AAA tax-exempt yields moved significantly higher across the yield curve. The selloff was driven by a combination of rising Treasury yields, persistent inflation concerns, renewed expectations of additional rate hikes, and continued heavy new-issue supply. Despite the higher rate environment, spreads on short-term, cash-collateralized, and M-TEB transactions widened, reflecting softer investor demand and ongoing market pressure. Municipal bond mutual funds returned to positive territory with $633 million of inflows, while high-yield municipal funds experienced $206 million of outflows.
The information contained herein, including any expression of opinion, has been obtained from, or is based upon, resources believed to be reliable, but is not guaranteed as to accuracy or completeness. This is not intended to be an offer to buy or sell or a solicitation of an offer to buy or sell securities, if any referred to herein. Lument Securities, LLC may from time to time have a position in one or more of any securities mentioned herein. Lument Securities, LLC or one of its affiliates may from time to time perform investment banking or other business for any company mentioned.
