Oil and the Strait of Hormuz

Oil finally moved in our favor this week. Brent has fallen to roughly $87 and WTI to $82 as diplomatic efforts have increased hopes for de-escalation with Iran.

That is encouraging, but the physical constraint has not changed. The Strait of Hormuz remains restricted, and oil flows are still dramatically below normal levels. In other words, the market has removed some geopolitical risk premium, but the underlying supply problem has not been solved.

That distinction matters. If tensions continue to ease, lower energy prices could provide meaningful relief to inflation and longer-term rates. If negotiations deteriorate, the risk of another sharp move higher in crude remains very real.

Canada Tariffs

The new 50% tariff on certain Canadian goods took effect August 22 and covers roughly $20 billion of imports. Canada has responded by suspending negotiations and announcing retaliatory tariffs beginning September 8.

In isolation, $20 billion is relatively small compared with the nearly $900 billion of annual trade between the two countries. The concern is where the tariffs are concentrated. Steel, appliances, agriculture and other goods flow directly into consumer and construction costs.

Just as energy inflation is beginning to improve, trade policy risks adding another source of price pressure. For the bond market, that makes the inflation outlook more complicated, not less.

Federal Debt Reaches $40 Trillion

Federal debt crossed $40 trillion on August 19, roughly double its level in 2017. Net interest expense now exceeds $1 trillion annually.

For mortgage rates, the important issue is not the headline number itself. It is the amount of Treasury supply the market must continuously absorb.

The federal government needs buyers for an enormous and growing amount of debt. Investors ultimately demand compensation for taking that duration risk, which shows up through higher term premium and higher long-term Treasury yields.

This does not determine where rates trade on any particular day, but it is an important reason long-term yields remain elevated even when markets anticipate eventual Fed easing.

The AI Capital-Spending Boom

Another emerging fixed-income story is the extraordinary amount of capital flowing into artificial intelligence infrastructure.

Hyperscaler capital spending is projected to exceed $700 billion in 2026. As those investments increasingly exceed internally generated cash flow, large technology companies are turning to the bond market and private credit for financing.

That matters to mortgage markets because corporate issuance competes for the same pool of fixed-income capital that buys Treasuries and agency MBS.

There is also risk in the opposite direction. If enthusiasm around AI breaks sharply, yields could fall as investors move toward safety. But rate relief associated with a broader credit or equity-market event would come with a very different economic backdrop.

The Long End Is Driving the Market

The 10-year Treasury is currently around 4.67%, while the 30-year is near 5.19%. The long bond recently traded at levels not seen since 2007.

What is notable is the shape of the move. The yield curve has continued to steepen, with most of the pressure concentrated at the long end.

That is why I believe focusing exclusively on the Fed misses the larger story. The Fed controls the overnight rate. It does not directly control the 10-year or 30-year Treasury.

Today, fiscal supply, term premium, inflation and energy prices are exerting far more influence over long-term borrowing costs.

Can Treasury Buybacks Help?

Treasury recently doubled the size of its long-duration buyback program, increasing purchases from $2 billion to at least $4 billion per operation.

The announcement initially pushed the 30-year yield lower by roughly 10 basis points. That rally disappeared within two trading sessions.

The pushback has been notable. Stanley Druckenmiller, Bessent's former mentor at Soros Fund Management, argued in a Wall Street Journal op-ed this week that Treasury risks crossing from liquidity management into price management. His broader warning was that higher long-term yields are a fiscal signal, and attempting to suppress them does not address the deficits and debt ultimately driving the market.

The program can improve liquidity and provide some incremental support to the long end, but it is not quantitative easing. Treasury is essentially replacing longer-duration debt with shorter-duration funding rather than expanding the money supply.

The early market reaction suggests the scale of the program alone is unlikely to overpower the broader forces pushing long-term yields higher.

Jackson Hole and the Fed

The market's immediate attention now turns to Jackson Hole and Chair Warsh's speech on Friday.

Investors will be listening closely for how the Fed balances persistent inflation against weakening employment. July payrolls declined by 23,000, while inflation remains well above the Fed's 2% target.

That leaves policymakers facing an uncomfortable tradeoff. Ease too soon and inflation could reaccelerate. Tighten further and an already softer labor market could weaken more significantly.

Markets currently assign roughly a one-in-three probability to a September rate hike, but I would be cautious about building a mortgage-rate outlook around that decision alone.

Whether the Fed hikes, cuts or holds, the reaction in long-term rates will depend on what the decision says about inflation, economic growth and future Treasury supply.

Mortgage Rates Remain Stubborn

Freddie Mac's latest survey put the 30-year fixed mortgage rate at 6.65%, its second consecutive weekly decline. That is an improvement, but not enough to materially change the affordability equation.

Mortgage rates remain well above the levels homeowners became accustomed to during 2020 and 2021. Monthly payments at today's rates are dramatically higher, and that affordability gap continues to weigh on purchase activity and housing turnover.

A few basis points in either direction may influence day-to-day borrower behavior, but the industry needs a more meaningful decline in long-term rates to materially change the housing outlook.

What I Am Watching

When I put all of this together, the biggest takeaway is that the mortgage market should be watching the long end of the yield curve more closely than the Fed funds rate.

The forces keeping mortgage rates elevated are increasingly structural.

The federal government is issuing enormous amounts of debt. Investors are demanding more compensation to own longer-duration assets. Tariffs threaten additional goods inflation. AI investment is creating another major source of fixed-income supply. And geopolitical risk continues to hang over energy prices.

There are also reasons for optimism. A genuine de-escalation in the Middle East could push oil materially lower and relieve inflation pressure. Treasury's efforts to improve long-end liquidity could help at the margin. Slower economic growth could eventually reduce inflation and bring investors back into duration.

If the 2s/10s spread holding under 100 bps signals a lower-volatility environment, that may set the stage for mortgages to perform well. We will need the market to shrug off AI spending fueling corporate bond issuance. And a cut in fed funds (currently a 30% chance of a hike) would bring in bank buyers and the GSEs, which is a long shot. That is the bull case.

Until that happens, I expect mortgage rates to remain volatile and relatively range-bound, even as the headlines surrounding monetary policy continue to dominate the conversation.

Federal Funds Rate

Source: Federal Reserve H.15 (August 25, 2026); prior report (July 29, 2026)

Next FOMC Meeting

Source: Federal Reserve calendar; prediction-market pricing as of August 22–26, 2026. Probability estimates have been volatile and should be treated as directional, not precise.

Rate Change Probabilities

Fed Influencing Factors

Freddie Mac PMMS & Mortgage Rates

30-Year Mortgage Rate Trend

Mortgage-to-10-Year Treasury Spread

Primary/Secondary Mortgage Market Spread

Treasury Yields and the Curve

Energy Complex and the Strait of Hormuz

Treasury Buyback Program and Fiscal Supply

Additional Housing Statistics & Originator Update

Q2 2026 Originator Earnings

Upcoming Market-Moving Events