Stronger
Kelly Clarkson is known for her rare combination of powerful belting, flawless technical control, and deep emotional delivery. With a slight stretch, one might consider current market conditions Clarkson-like. In recent weeks, the bond market has sent a powerful (dare we say belting) message that it either loves the United States’ growth prospects or hates the inflation and supply outlook. Accordingly, U.S. interest rates have reached highs previously set in 2007, and corporate bond credit default swaps have widened very quickly to April 2026 levels. The economy, for its part, seems to be technically in control. Last week’s data suggested stable labor conditions based on the ADP report, jobless claims, and the BLS employment situation. Emotions, however, are running high. Perhaps it’s the longevity of the war or early fatigue from the upcoming midterm election cycle, but last week’s consumer confidence report suggested a new low, breaching pandemic-era troughs. This isn’t localized angst, though. Canadians, typically known for exquisite hockey skills and pleasant dispositions, are currently debating whether the province of Alberta should secede from its maple-leafed territory, while Prime Minister Mark Carney reportedly beefed up the Canadian military in response to fears of an American invasion. Clarkson sings in one of her power ballads, “What doesn’t kill you makes you stronger.” While interest rates and geopolitical tensions are rising parabolically, Clarkson provides perhaps a glimmer of hope that economies have endured past rising-rate and wartime environments and can still “stand a little taller.”
Rates
Domestic interest rates have reached approximately 20-year highs following a macro narrative centered on growing inflationary fears, robust economic development, fiscal largesse, and a large supply of fixed-income products. Since February of this year, the 10-year Treasury yield has increased nearly linearly from a low of 3.94% to a recent peak of 5.28% before closing at 5.28% on Friday.
September was by far the most painful month for low-rate hopefuls, and the frequency of large upward swings was also particularly painful for our market. Because mortgage loans are rate-locked months before closing and security creation, investors hold the promise of a security to be delivered in the future. This becomes particularly difficult when the security becomes packaged or available for sale, however, after a large upswing, is no longer attractive because the “new” market conditions are much more attractive compared to the initial interest rate. Add to this the prospect of more liquid and current products, such as corporate bonds or residential mortgages, and it is not too difficult to see why our market has experienced an unfortunate double whammy of higher rates combined with persistently widening investor spreads. Long story short, our market has become even less attractive after years marked by the fallout from Silicon Valley Bank, underwriting fraud, and rising (albeit still low) levels of delinquency and forbearance. The bright spot was clearly in February, when rates were low and extreme optimism followed that $200 billion social media post about government purchases in the mortgage market, which didn’t really pan out for us.
Economy
Last Wednesday, Austan Goolsbee, president of the Chicago Fed, said, “If you look at the reason why the economy has continued pretty solidly over the last several years, it’s that broad-based consumer spending,” adding, “It hasn’t been primarily focused on just high-income people. And it’s been correlated with a strong labor market.” Goolsbee’s words build on what we published last week: the post-pandemic macro narrative has been robust and resilient. That strength, though, cannot be considered everlasting in a frictionless environment. It makes intuitive sense that, as economies age, the labor market expands less as available jobs are absorbed by the remaining pool of workers. Alas, this cycle is no different: since the pandemic recovery, job gains have remained positive but have lost momentum in consecutive years. We illustrate this point below and note that the 2026 figures are not final and include data only through September. It wouldn’t be shocking to see some negative numbers heading into winter, which would bring this year closer to, or below, the 2025 figure.
Emotions
Tangential to Goolsbee’s other point, consumer confidence remains elevated but, like its labor counterpart, is dwindling. This trend also jibes with historical precedent, as late-stage economic expansions are accompanied by drops in confidence.
While confidence has dropped more than 40% from its 2018 peak, the declines have been manageable, amounting to 6.4% year to date in 2026 and 8.0% in 2025.
The rate environment has changed so quickly that the market is in a near-constant state of recalibration. At the end of 2025, fed funds futures priced in roughly 2.3 quarter-point cuts during 2026. Since then, expectations have moved through a prolonged hold and toward the prospect of additional hikes before year-end. The reason is straightforward: the economic and inflation outlook has changed. Perhaps it is the euphoria surrounding the Cleveland Browns’ 3–1 start, but a line from Draft Day comes to mind: “We live in a different world than we did just 30 seconds ago.” That aptly describes the speed of this year’s repricing. Yet just as the market has moved toward a more hawkish outlook, the Fed’s message has become somewhat less definitive. Vice Chair Philip Jefferson emphasized that future policy adjustments should depend on “trends in the data, the evolving outlook, and the balance of risks,” noting that reaching a judgment “may take more time.” Vice Chair for Supervision Michelle Bowman similarly said she does not see “an urgent need for further action” and wants to better understand the totality of the data while remaining attentive to the risks.
The path forward remains foggy. Escalation in the Middle East appears more likely than resolution, leaving the outlook for oil and inflation closely tied to the conflict—and the FOMC closely tied to the inflation data. Against that backdrop, the market is struggling to find its footing. Persistent uncertainty, combined with sharp moves in interest rates, is likely to keep pressure on the mortgage market and lead to rougher conditions ahead. Still, in the spirit of Clarkson’s refrain, there is some reason for optimism: several Fed officials appear increasingly willing to pause before pursuing additional rate hikes. If the bond vigilantes follow their lead, the market may finally find some calmer waters.
FROM THE DESK
Agency CMBS — No sugarcoating it here, spreads are wider. DUS spreads are”five-bps wider while project loans are “four-bps wider. Investor appetite seems to be lighter, perhaps due to quarter end, but certainly due to the sheer speed at which rates are rising, leaving anything purchased “yesterday” surely at a discount. 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 market conditions improved during the second half of last week as technical factors became more supportive. AAA tax-exempt yields were modestly lower on the front end of the curve, while long-term yields moved higher. September concluded with more than $55 billion of issuance, marking the largest September on record. After weeks of heavy supply, a slowdown in issuance combined with the start of October reinvestment flows helped stabilize the market and bring an end to the recent bond rout. Fund flows remained challenged, however, as municipal bond mutual funds experienced $606 million of net outflows, including $380 million from high-yield municipal bond funds.
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.
