With little economic data on the calendar this week, and many people away from their desks, bond markets traded in a tight range absent any major headlines. The release of the December FOMC Minutes reinforced a familiar theme: most policymakers still expect rate cuts if inflation continues to cool, though a meaningful minority favors holding rates steady for longer. Markets barely reacted, with odds of no change at the late-January meeting still around 85 percent. President Trump again floated potential successors to Fed Chair Powell and raised questions about Fed leadership, keeping concerns about central bank independence simmering on the backburner.
FHFA data showed home prices rising 0.4 percent in October, lifting year-over-year appreciation to a modest 1.7 percent, though regional divergences were stark, weakness in parts of the East and Central regions contrasted with strength in the West and Middle Atlantic. Meanwhile, the Chicago PMI surprised to the upside, albeit remaining firmly in contraction territory. Labor market data showed initial and continuing jobless claims both coming in better than expected, reinforcing the narrative of a cooling (but not collapsing) job market. Even so, unemployment has drifted up to 4.6 percent, and hiring momentum remains sluggish.
I wrote earlier this week about Agency MBS supply in 2026: While total issuance is expected to remain roughly in line with 2025 at around $1.4 trillion, the composition may shift meaningfully toward adjustable-rate mortgages if yield-curve steepening persists. Modern ARMs, which are indexed to SOFR and aimed at higher-credit borrowers, are no longer affordability products but strategic tools for banks seeking durable customer relationships. ARM issuance has already begun to rebound from QE-era lows, and further curve steepening driven by Fed cuts at the front end and heavy Treasury supply at the long end could accelerate that trend, even without an increase in overall mortgage supply.
All in all, the mortgage industry closed 2025 on a cautiously optimistic note. Mortgage rates fell for a third straight week to their lowest level of the year, with the average 30-year fixed rate ending at 6.15 percent, well below where it began the year. Treasury yields also retraced meaningfully, pending home sales rose to their highest level since early 2023, and disinflation appears to be broadening. That said, affordability remains a major constraint: builder sentiment is deeply pessimistic, homeownership rates (especially among younger households) continue to decline, and purchase activity is still well below historical norms. The silver lining is that home prices are now falling in many states, a trend that could gradually restore affordability and demand in 2026. Against a backdrop of widespread skepticism and macro anxiety, the underlying fundamentals (i.e., cooling inflation, orderly labor-market adjustment, and functioning capital markets) suggest the groundwork for a better year ahead than the one just finished.