I have good news for you: a complex mix of inflation data, labor market weakness, and shifting expectations around Federal Reserve policy, pushed mortgage rates to fresh 2025 lows. The August Consumer Price Index (CPI) came in slightly hotter than expected at +0.4 percent month-over-month, driven by rising food, shelter, and transportation costs. While Core CPI held steady at 3.1 percent year-over-year, still above the Fed's 2 percent inflation target (though that pertains more to Personal Consumption Expenditures), markets largely interpreted the report as not strong enough to deter the Fed from a rate cut next week (ed. note: a 50-basis point cut still appears unlikely). Weekly jobless claims added to the dovish sentiment, rising sharply to 263k, the highest since 2021, suggesting cracks in the labor market that support the case for further rate easing in October or December.
Treasury yields responded accordingly, with the 10-year dipping to around 4.00 percent and longer-dated securities holding firm despite a lukewarm 30-year auction. Wednesday’s $39 billion 10-year auction was notably strong, featuring a 1.3-basis points stop-through and massive non-dealer participation, especially from foreign buyers. Thursday’s 30-year auction, however, was just fair, with lower demand metrics across the board. Despite this, mortgage rates continued to drop, with Freddie Mac reporting that 30-year fixed rates fell 15-basis points to 6.35 percent, the lowest since October 2024, and 15-year rates dipped to 5.50 percent. Mortgage credit availability also improved modestly in August, and MBA applications surged 9.2 percent week-over-week, bolstered by lower rates and the usual post-Labor Day seasonal rebound.
Meanwhile, the Trump administration reignited reform discussions around Fannie Mae and Freddie Mac, revealing growing tensions between Treasury Secretary Scott Bessent and FHFA Director Bill Pulte. Treasury hosted a series of stakeholder meetings focused on long-term reform, while FHFA pushed for a near-term IPO of government-owned shares, creating a split strategy that underscores the political and financial stakes of the $7 trillion mortgage-backed securities market. Market participants voiced concerns over regulatory oversight and competition should the two entities merge, a proposal floated by both Trump and Pulte. As legacy shareholders cheered rising stock prices, the policy direction remains unclear, but the power struggle between agencies will shape housing finance in the years to come.
Elsewhere, MBS prepayment speeds came in close to expectations for August, with FN30s and GNIIs slowing modestly while FN15s underperformed. A small drop in mortgage rates and a 7.5 percent rise in the MBA Refi Index contributed to the trend. At the same time, gross MBS issuance reached a year-to-date high of $108.6 billion, boosted by stronger FN30 and FH30 activity, although GNII30 issuance continued its decline. Fannie Mae net issuance remained negative for the seventh straight month, and the Fed’s MBS paydowns stayed well below the $35 billion cap. Forecasts suggest steady issuance and speeds into fall, with refinance activity likely to pick up further when the Fed begins cutting rates.
Adding another layer of uncertainty, the Supreme Court agreed to fast-track its review of the Trump administration’s Liberation Day tariffs, which have played a significant role in bond market movements since early this year. Treasury Secretary Bessent warned that if the Court rules the tariffs illegal, the government may be forced to significantly increase Treasury auction volumes to make up for lost revenue, potentially spiking rates even in a rate-cutting environment. Combined with weaker job growth revisions, showing 911,000 fewer jobs than previously reported, and the market’s ongoing recalibration of the Fed’s terminal rate (thought to be somewhere just south of 3.00 percent, currently), the mortgage and broader fixed income space remains sensitive to shifting macroeconomic signals, policy risks, and political developments.