What's old is new: Economic uncertainty, shifting interest rate dynamics, and continued fallout from the government shutdown. Volatility returned to markets following renewed tariff threats from President Trump, which helped push bond yields lower. The 10-year Treasury yield briefly flirted with the psychologically significant 4 percent level before retreating, signaling persistent investor caution, and then finally broke through that barrier yesterday to drop into the 3s. Mortgage-backed securities saw modest price declines and spreads widened slightly, particularly in the 5 to 6 percent coupon range. Meanwhile, economic data was limited due to the ongoing government shutdown, now entering its third week, with significant delays in key reports like housing starts, PPI, and industrial production. The shutdown, combined with ongoing geopolitical tensions, contributed to a "risk-off" tone in markets, and the flattening yield curve reflects investor anticipation of slower growth.
Federal Reserve Chair Powell hinted that the central bank may soon stop shrinking its balance sheet, reinforcing market expectations of at least one more rate cut before year-end. With labor market data increasingly unreliable due to survey inconsistencies and the shutdown, Fed officials find themselves flying blind. September hiring plans were the weakest since 2009, and nearly a million jobs may have been overstated in past reports. Despite concerns about inflation, which remains elevated, weakening labor indicators are putting downward pressure on policy rates. Market expectations currently lean toward a 25-basis point cut in both October and December, but with data releases delayed, the December FOMC meeting could become the most pivotal of the year.
30-year mortgage rates held steady near 6.3 percent, supported by a narrowing spread to 10-year Treasury yields, now down to 217 basis points from a 2022 peak of 317. This compression reflects easing policy expectations and improving MBS market conditions. Demand from private, non-bank investors has helped stabilize spreads, as has a clearer monetary policy outlook. However, uncertainty around inflation persists, especially with CPI delayed until October 24, a crucial release for both Social Security COLA calculations and Fed decision-making. While volatility has been relatively contained, market participants expect it to increase as more data becomes available and policy clarity returns.
On the legal and regulatory front, the mortgage world saw notable developments. California mandated mortgage forbearances for wildfire victims, while a political storm brews over FEMA funding. The city of Los Angeles joined a coalition suing the federal government for delayed disaster assistance. At the same time, the CFPB quietly rolled back transparency provisions enacted over the last two years, reinforcing concerns about a shifting regulatory tone. The agency's future remains uncertain, especially with senior officials suggesting its potential dissolution despite ongoing legal debates. The mortgage industry now sets its sights on events like NAMB National and MBA Annual in Las Vegas.