A combination of policy noise, economic data continuing to beat expectations, a meaningful drop in mortgage rates, and elevated uncertainty dominated the narrative this week. Markets continued to digest geopolitical tensions, legal risks around tariffs, and renewed political pressure on the Federal Reserve, but Treasury yields ultimately remained range-bound as investors waited for clearer signals from data and the Fed. Even potential shocks, such as a Supreme Court ruling on tariffs or investigations touching Fed leadership, were largely absorbed without lasting market disruption, reinforcing a sense of low conviction and cautious positioning.
On the data front, the economic picture stayed mixed but broadly consistent with a “no rush” Fed. Retail sales surprised to the upside, jobless claims remained low, and regional manufacturing surveys showed resilience, while inflation data came in generally in line to slightly cooler than expected despite acknowledged measurement distortions. Together with December’s jobs report, the data reinforced expectations that the FOMC will skip a January rate cut and reassess in March, even as political scrutiny of Fed independence complicates both policymaking and market interpretation. Rate cut odds for early 2026 continue to fade, pushing expectations for normalization further out.
Mortgage rates were the clear bright spot. The 30-year fixed rate fell to the low-6 percent range, reaching its lowest level in years and immediately unlocking demand. Mortgage applications surged, driven by both refinancing and purchase activity, while existing home sales rose for a fourth straight month and single-family transactions hit their strongest pace since 2023. Inventory tightened modestly, price growth remained subdued with notable regional differences, and while near-term activity should continue improving, affordability constraints suggest housing momentum will remain measured rather than explosive.
In the secondary market, the much-discussed $200 billion GSE MBS purchase directive continued to support spreads, but prepayment activity stayed muted overall, with only a small share of the conventional universe truly in the money. Servicer behavior remained a key differentiator, with wide dispersion in speeds across coupons and loan ages, and FHA credit stress emerged as a growing concern as severe delinquencies climbed sharply, especially in lower-coupon Ginnie Mae pools. This dynamic is creating both risk and opportunity, particularly for investors focused on discounted FHA collateral and vulnerable 2022 vintages.
ARM lending and issuance added another important theme, with healthy Ginnie Mae II ARM flow and growing interest from borrowers seeking payment relief in a high-price environment. Broader MBS trading calmed as the week progressed, Treasury auctions were well received across the curve, and mortgage markets ended the week on firmer footing despite heavy headlines. Your takeaway: rates are lower, demand is responding, credit trends are diverging beneath the surface, and while policy and politics continue to dominate headlines, fundamentals and execution are once again driving outcomes.