Everest
The top of Mount Everest is said to be eerily quiet, with thin air, little traffic, and poor cell service. Our market has felt much the same since the 10-year Treasury yield climbed from 4.75% to 5.28% in September. After marking its 2026 low at 3.94% in late February, one day before the U.S. and Israel launched the war with Iran, the 10-year yield has risen steadily.
The speed of this move rewarded patient investors, who often capture a higher yield by waiting another day or, sometimes, another hour. Subsequent Fannie Mae and Ginnie Mae MBS auctions brought wider investor spreads, too. In today’s conditions—where rates are higher, spreads are wider, and waiting has become its own market bet—Lzzy Hale’s song “Everest,” an anthem of resilience and perseverance, captures the mood.
As Figure 1 shows, borrowing rates for both Fannie Mae DUS and Ginnie Mae project loans increased precipitously over the last month. The principal catalysts are the sharp rise in Treasury rates and widening investor spreads spawned by cautious buyer appetite. The rates complex remains beholden to a macro narrative centered on growing inflation concerns, robust economic growth, fiscal largesse, and heavy fixed-income supply. Generic mortgage rates have approached levels reached after the 2023 regional banking crisis, although the latter move was driven largely by investor anxiety specific to the product. At the risk of breaking one of the golden rules of finance … this time may be different.
As Figure 2 shows, wider investor spreads are not confined to agency lending. The Bloomberg US CMBS 2.0 Aaa 8.5+ Year Average option-adjusted spread (OAS) has moved in a similar direction, although to a lesser degree. Corporate bond spreads have widened as well (Figure 3).
For context, U.S. CMBS 2.0 represents the post-2008 generation of commercial mortgage-backed securities, with stronger structural protections than pre-crisis CMBS 1.0. That makes it a useful, though imperfect, comparison to the agency products that we originate.
Figure 2 focuses on Aaa-rated tranches—approximating the explicit, or implicit, government support associated with Ginnie Mae and Fannie Mae MBS—on an 8.5+ year duration. These tranches are broadly comparable to standard Ginnie PL prepayment structures (generally 10 years) and Fannie DUS yield maintenance (e.g., 10-year/9.5-year). The option-adjusted spread also measures compensation over the risk-free rate after accounting for embedded optionality, including prepayment risk.
This adjacent market experienced approximately five basis points of spread widening in recent weeks. The move has been smaller than in our market, but CMBS tranches are produced from a pool of loans, typically diversified among several different types of real estate (excluding single-family), rather than a single asset loan like Ginnies and Fannies. Aaa-rated corporate bonds widened by approximately eight bps as well.
Product-specific factors have amplified weakness in agency lending, yet the direction across these markets points to broader unease throughout all fixed-income products.
We’ve heard chatter that the only thing that could reverse the selloff in Treasuries is an end to the war with Iran. This concept became more popular following President Trump’s post on social media last Thursday, when he wrote that the U.S. is having “productive discussions” with Iran and will “not be attacking Iran at any time prior to the midterm elections.” Rates rallied throughout most of Thursday but retraced on Friday once the market had more time to digest Trump’s post.
Though deescalation is desired, it may not be the only catalyst to bring back lower rates. The war created structural problems in energy markets; it will take additional time to return idle plants online, as well as to rebuild those that were severely damaged. The downstream effects of energy supply constraints will, therefore, likely take months to resolve. Similarly, austerity seems to have taken a backseat in importance on the fiscal side to growth, defense, immigration funding, and, of course, special interests.
Nevertheless, our analysis is not meant to be doom and gloom. While spreads and rates have grown challenging, rate locks are still occurring. Ginnie Mae PL origination is also expected to outpace the previous fiscal year, which bucked the trend of consecutively lower origination volume since 2021. Furthermore, Ginnie and Fannie DUS spreads are well below the wides of the last couple of years (Figure 4).
For borrowers, the relevant concern is no longer whether today’s rates look attractive relative to the recent past, but whether current financing supports the borrower’s operating and investment objectives. Ancillary financing sources may be drying up, making this an opportune time to lock in agency debt. Alternatively, the prospect of future interest-rate reductions may allow borrowers to return their attention to operations now, then refinance later.
Rates may appear high through the lens of recent experience, yet there’s little reason to assume a return to the unusually low borrowing costs that prevailed for much of the past two decades. In short, rather than wait for rates to descend, borrowers may be better served by finding financing that works at today’s altitude.
FROM THE DESK
Agency CMBS — Last week was quieter from an originations point of view: approximately $675 million of new Fannie DUS came to market. Spreads remained under pressure for both Ginnie project loans and DUS. Small Ginnie perm loans are now trading better. In DUS, however, the opposite is true—typical market-rate loans below $10 million require a concession of five to 10 bps.
Municipals — AAA tax-exempt yields moved lower on the front end of the curve and slightly higher on the long end of the curve. Although market volatility has persisted in recent weeks, the resulting increase in yields created more compelling entry points for investors, particularly relative to the significantly lower rate environment that existed just one to two months ago. Municipal bond mutual funds recorded $1.1 billion of net inflows (reversing the recent trend of outflows), although high-yield funds had $164 million withdrawn. Importantly, recent outflows should not be viewed as a wholesale exit from the municipal market, as a substantial share of assets continue to migrate into municipal exchange-traded funds. This development reflects a shift in preference for investment vehicles, rather than a decline in overall demand for municipals.
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.
