1H 2026 Mortgage Market Recap: Rates, Inflation, Fed Signals & Lock Volume | July 28

Jim Glennon (: 00:00

Welcome to Optimal Insights. I'm your host, Jim Glennon, Senior Vice President of Hedging and Trading Operations at Optimal Blue. Our clients and industry partners have long relied on Optimal Blue for trusted insights and commentary. And these podcasts are an evolution of our commitment to keeping the industry informed. Let's dive into today's episode.

Jim Glennon (: 00:34

Okay, welcome everybody. Thank you for joining us here for our last installment of Optimal Insights for July. In the interest of keeping you informed, we're always going to strive to bring you up to the hour, current events, and how you should think about them, whether you're an originator, hedger, capital markets person, or just someone that's interested in the mortgage industry or some good market commentary. So on that note, we're going to start off with a market update here in a moment.

not a ton going on, but we do have a Fed meeting this week that we should talk about and s a couple of numbers that came out last week. One of which I I I think is worth talking about. Pretty interesting was the the jobless claims number.

talk about the first half of: 2026

events that have happened in: 2026

Still, you know, volume is still healthy. Volume's been pretty steady throughout this. It it ebbs a little bit when we get closer to six and three quarters, picks up a little bit around six point four nine, but still just continuing to see volume quarter over quarter grow as we get further and further away from historically ro low rates that we saw during the pandemic. So let's get into some of this. James, welcome. Thanks for being here.

James Cahill (: 02:27

Thank you, Jim.

Jim Glennon (: 02:29

let's just start off with just

Not a ton on over the last week, but we did have some interesting numbers. What what it was what did you take away from some of the prints last week?

James Cahill (: 02:39

last week was meant to be pretty dry. We weren't expecting much, no real reporting coming out until Thursday. It was the initial jobless claim. So you know that number, it's rare that it's a a huge mover, but it's always something to keep your eye on. However, last week it did turn out to be something worth talking about.

So that number came in at 187,000, which was well below the 212,000 that we expected.

with concerns around inflation, you know, being the main item driven by the war, the any positive news around the employment situation is really gonna be pushing the assumptions towards a rate hike.

Right as as jobs jobless claims come in lower and lower, it looks better and better for the economy. It means that we're pretty good on the employment side, gives the Fed more leeway to worry about the inflation side of things.

Jim Glennon (: 03:37

Yeah, so many worries about jobs over the past couple of years, whether it was through AI or tariffs, and just still seem to be defying gravity in that respect. It's, you know, you're seeing it trend wise in the survey data. So the the monthly unemployment report is showing a slow trickle of new jobs being created, but also a slow trickle of the unemployment rate dropping to around four point three. And meanwhile, then th last week one eighty seven, isn't that the like the lowest it's been in

thirty years or something. Since the nineties the last time we saw a number that low, I I think I saw a headline on this.

James Cahill (: 04:13

Yes, it it's a it's a very, very low number historically. It is going back about thirty years, so back to the nineties. it does re-encourage, hey, the Fed.

Has more leeway here. And so we saw rates actually, the 10-year treasury rate pushed up about 4.7%.

So that really kind of spooked the market. Everyone had to rehedge on Thursday, you know, adjust a little bit after all that movement. But it has come down a bit since. As of right now, the 10 year, we are sitting.

Jim Glennon (: 04:48

four six five.

James Cahill (: 04:51

four six five. So still within the range, striking distance, but good to see it it petered back a little.

Jim Glennon (: 04:59

Yeah. No, I I mean, again, th these these are positive things to hear, even though it does not bode well for interest rates. This just prolongs the thesis that rates are going to be higher for longer. It's, you know, it's beaten up the the mortgage secondary market a little bit too. We've we talk about that on our our webinars and is worth talking about here. Some of the like specified payups you you typically would expect to get for things like low loan balances or

Loans in the state of New York or other states where it's difficult to foreclose, those payups have kind of dried up over the past six months or so because demand for those assets has dried up as rates are just expected to be high overall, right? You all have we've talked about specified payups on this podcast before. And basically the the theory behind specified payups is the less likely a loan is to prepay, meaning the longer it's

expected to make payments, the more that bond is typically worth to an investor. And today all bonds are worth quite a bit because the borrower's expected to pay on a mortgage originated right now for many, many years because rates are not expected to drop below where they are today or significantly below where they are today for any time in the foreseeable future. So again, it's good for the economy, not good for mortgage rates, but we will keep an eye on it. and even I was reading just

on Sunday yesterday that the like a lot of the big corporations, the large employers are starting to hire again. And that again throws cold water on the thesis that AI is just shattering entry level jobs. So that that that was the excuse used by a lot of these corporations over the past couple years. And many have theorized that it was that it was just an excuse to just sort of call the herd, if you will, maybe

lay off some low performers or get rid of some of the excess that excess hiring that may have gone on during the COVID times. But now cor b the big corporations are coming back in and buying s start starting to pick up labor, which is an interesting interesting fact at while at the same time they're also investing a ton of money into AI to increase productivity. So that's I think that's good news because I think there's a lot of folks out there that are scared or worried about AI taking jobs in the in the near future and

You hope that the other thesis plays out, which is that it just allows us to be more productive with the same or even a growing amount of employees just being able to to to crank out more product of whatever you're building or whatever service you're providing.

James Cahill (: 07:34

Fully agreed. And it's nice to see, you know, it's low hire, low fire for quite a long time. It's nice to see that start to break a little bit, some of the hiring coming in, moving again.

One other event that did sneak in last week, Friday, there were a new set of tariffs announced by the administration. these were put under section 301. So it's different than the AIPA tariffs that were ruled unconstitutional by the Supreme Court earlier this year. These are technically targeted for a reason. The reason used is

forced labor. So if you're putting it on some country that you suspect might use forced labor, that is the excuse that you use to put the tariff. Or if you know say England imports from a country that you are trying to punish, you are punishing England for doing so. So that is the logic behind how these apply to effectively every country on earth.

They're aimed actually it's aimed at about sixty different countries, but it's ninety-five percent of all US imports. So effectively everyone

who's directly relational to us. the tariff rate is going to sit between about ten and twelve percent, which is about in line with what we were seeing negotiated out on the AIPA tariffs earlier this year.

Jim Glennon (: 08:55

Right. So this was expected to some extent. We weren't sure exactly how it was going to get done, but we knew that once the Supreme Court shot down the first couple rounds of tariffs and the reasoning for the putting those tariffs in place, we knew that the White House would find or had already had in mind another reason or another pathway to impose tariffs on countries. And in this case, as you said, it's it's basically punishment for things like human rights violations.

Right, which can extend to even a country that you import from where they may not have forced labor in the UK. If the UK is importing importing any sort of product from you know, a a country, a third world country elsewhere that that employs forced labor, then then we can theoretically impose those tariffs. So I'm sure that will go through the courts as well. But in the meantime, as you said, ten to twelve percent. Wasn't really a needle mover though, right? The market did not react much at all. Certainly did not react the way it did.

A year and a half ago when tariffs were first announced But we had almost no reaction. Is that do you think that's because it's they're kind of flooding the box again? Like we're we're we're talking about oil, we're talking about Iran, we're talking about jobs, talking about the new Fed, and then boom, there's this other tariffs came back, right? We almost forgot about tariffs. Or is it that we know that this is just an ongoing theme, the market has already priced all of this in?

James Cahill (: 10:16

I would say two pieces. First is that after the Supreme Court ruled against the AIPA tariffs, there were still emergency tariffs put in place to try and keep a a threshold there. So it it never went,

you know, back down to zero.

so this this isn't l you know, a full ten, twelve percent spike immediately. I think that the markets were pricing this in. It was known that this will kind of come back around as an issue. And I also would say it's going to be a little bit

Of a longer drag out here, right? With

the Liberation Day, it was such a sudden spike, such a sudden item. Everyone had to react and try and assess how this would impact us. With, you know, we've had the past year to try and get used to this, try and figure out how supply chains are going work. So it's almost a continuation. I think any inflationary effect or any negative impact on the market is just gonna take a little bit longer to bleed in.

Jim Glennon (: 11:10

Mm-hmm. That makes sense. All right. So that is what happened last week. This week we gotta have at least a couple of things going on. We have the FOMC meeting Wednesday, right? Certainly no

James Cahill (: 11:24

Yeah,

Jim Glennon (: 11:24

changes expected there, I don't think. Are we pricing in a a hike at all at this point?

James Cahill (: 11:30

Not for the July meeting. With Warsh's second meeting here, it looks like we are gonna be sticking right where we are, three and a half to three spot seven five. this is really solidly here, but again, the positive jobs news from last week has pushed future expectations very much to a rate hike. September is now about an 80% chance that we'll see a hike, either, you know, twenty-five to fifty basis points leaning twenty-five. So they've really been

pushing that up, it we'll see something potentially fifty by the end of the year is the most likely outcome of the next two, three meetings.

Jim Glennon (: 12:09

All right. Well that's good. I mean, it'd be wild if we saw a hike this week, if the Fed really wanted to cement themselves as as some sort of black box. They could do that, I suppose. But yeah, to your point, it it seems very unlikely, even though suddenly a month and a half from now we're almost insured a hike, which is I don't know, that the it feels like the I don't know, somebody's getting side information, but

I guess we'll see what happens today and we'll see what happens in September.

James Cahill (: 12:40

You would think if there was a one hundred percent chance of a rate hack next month, why not just front, you know, do it now?

Jim Glennon (: 12:46

Right. How's how's it how's it

zero percent right now? but

James Cahill (: 12:50

Yeah.

Jim Glennon (: 12:52

like we always say, follow the money.

All right,

what else should we be looking out for this week?

James Cahill (: 12:59

Yeah, well, just after the FOMAC meeting, we'll see PCE. So generally the Fed's preferred inflation index. this is expected to come out about four point one percent for year over year, and the core at three point four percent. So well, I kind of bang on this a lot, but it is their preferred number, and Warsh is saying, Hey, I kind of only look at the handle right now. So even looking

at the handle.

That is a 3% handle. That's not where we want it to be. So that is part of what's driving the future rate hike expectations is these PCE numbers keep coming in and higher. We did see a little bit of relief in PCE and CPI last time around, with oil coming down a bit in June, though this July has been more volatile. So we expect to see a little bit of a staying where we are, if not pushing up more.

Jim Glennon (: 13:58

Right. Yeah, w oil's been on a wild ride even the last few days. You were pointing this out before we started recording. We had one hundred dollar oil last week, and then suddenly over the weekend, nothing happened really, other than more talking about talking in terms of diplomatic relations and then oil drops by ten bucks a gallon this morning.

James Cahill (: 14:20

Yes. I you know, I I haven't sat down with my oil futures pricing kit in a minute, but you know, Friday when I was taking these notes, their oil was at a hundred dollars a barrel. The Houthis were threatening to h block transit going southwest of Yemen.

But you know, that was the threat on Friday. that threat was not alleviated this weekend. The

announcement is that we will be having discussions with Iran, which is good because I thought we were having them, you know, the past few months. So

Jim Glennon (: 14:51

Right.

James Cahill (: 14:52

I I don't quite understand why oil has dropped ten dollars a barrel, but the assumption that there will eventually be relief to this does drive that pressure downwards.

Jim Glennon (: 15:04

Agreed. Even if it feels like Groundhog's Day every single time.

James Cahill (: 15:08

Mm-hmm.

Jim Glennon (: 15:08

But yes, obviously we would all like this conflict to be over for many reasons. Human safety, you know, being at the top of that list, but also just the noise and the the the inflation pressure. 'Cause we really could get a pretty good relief second half of the year if something does happen here, at least where if the straits reopen and the violence kind of permanently ends. We certainly could see the two handle, I would hope, by the end of the year. And that would give even more

reason to maybe we we won't have to see these hikes, right? Maybe we can we can kind of skirt along with rates where they are today or something close to it.

Anything else f on this week's data, James?

James Cahill (: 15:51

I would say those are really the two most important items to watch out for.

Jim Glennon (: 15:57

The Fed and the war. All right. So let's talk about the first half of the year and what has affected mainly affected rates, but also affected our industry, affected the economy. And I'll just kind of go by the order of of this list you've put together, which is pretty comprehensive. I mean, gas prices. We were just talking about oil. Gas prices have been on an even more wild ride because there's even more.

like supply and demand and just sort of reaction pricing that happens with gasoline, right? We all know it takes weeks or months to for oil to come out of the ground and become gasoline. Yet as soon as this war started, gasoline went to new highs that we haven't seen in in several years, right? And then every time there's one of these pullbacks, we get we get a four handle, maybe or three handle on gasoline. And now we're back, you know, last week we were back up over four.

I don't know. What what what's your take on where we've been with gas so far?

James Cahill (: 17:00

Yeah, I I think gas is it's kind of a good item to start with. It's gonna underpin a lot of this.

January first, gas prices were floating around two dollars and eighty cents nationally, right? Looking at today, it's about four

dollars and eleven. during May, we saw as high as four thirty, four forty. So it's really gone on quite a ride around.

gas is kind of an interesting one just because there's nothing the Fed can do.

Right. You can hike rates as much as you want. It's not going to produce any more gas.

it's gotta come, it's gotta come, you know, out of the ground, it's gotta be processed, it takes time, there's not too much you can do, but it does underpin all of consumer goods. So

it is a direct input into inflation in the United States. It's why we have core and non-core numbers.

Just to compare, hey, what energy is doing is going to drive everything else. So if you strip it out, how is everything else moving? So this, you know, since the war, gas prices have really ramped up and it's going to bleed into everything else that we talk about, mainly inflation.

Jim Glennon (: 18:06

Right. Yeah, as we've said before, it's it's you're kind of double counting fuel in a lot of areas because fuel is how goods get from point A to point B and fuel keeps the lights on in the restaurant and and drive the employee to work, but also gas prices are included in the inflation number as well as whatever, broccoli, you know, that has

James Cahill (: 18:26

Mm-hmm.

Jim Glennon (: 18:27

to ride in a truck across the country to get to where it's going.

James Cahill (: 18:30

That's the one I always think about is the ha you know, the food at the grocery store. How did it get there? Somebody drove it there. So it's a cost.

Jim Glennon (: 18:34

Right. Yes.

Based on and it's almost always fossil fuels that got it there.

James Cahill (: 18:40

Yeah. so with gas, you know, of course we have CPI. CPI at the beginning of this year, starting Q1, it was about two point four percent before any adjustments. the latest release was three point five percent. Now, as we just said, this is really, really driven by oil and gas. Even in the past report or the most recent report when we saw a little bit of relief in the war, we saw that number come down. But we have moved CPI. So the consumer, what we are seeing.

It's moved up a full point on the handle, so the wrong direction. PCE is actually

It's a a little tighter. in February, right before the war, we sat at 2.9% for the full number. Now, as of May, we were sitting at 4.1%, which is where we expect to be with the release this week. So PC, you know, it's the Fed's number. They look at course, they're gonna strip some of this out, but going from 2.9, so nearly three, all the way up to four.

It's a full point gain there going the wrong direction. It's a it's a big drive the wrong way.

Jim Glennon (: 19:49

Yeah, we were so close. We were right there, especially, you know, Kevin Walsh was not the Fed chair when the year started. But by the time he took the reins, we were already at this new handle. But had had he taken the reins earlier in the year, or had we not had this run up in fuel prices, we would we were already at the two handle. We were good. You know, we we probably would have seen lower rates, long term rates, and probably would have seen lower short term rates as well, because the Fed might have had an opportunity to to either pause or cut. but here we are.

this this this war was not without its consequences. We didn't see the worst of expectations. I think some folks were calling for a much bigger shock or for the shock to be much more pronounced. But I think, you know, a lot of credit to the energy producers of the U.S. have really put the pedal down to an almost unsustainable level. That doesn't get a lot of press recently, but it is a thing. And I think the White House had a lot to do with just basically calling up

all these energy producers and just telling to to drill and pump as much as they could. 'Cause we're certainly a bit insulated in the US over this first half of the year from some of these energy shocks, right? I mean Europe and Africa have just been getting hammered. Asia have been getting hammered by it some of this disruption and the flow of oil and gas through the strait.

James Cahill (: 21:10

Certainly. It you know, it's always proof of how resilient the country can be, how amazing the resources we have, the infrastructure we have, how it really is built to try and run on its own.

Jim Glennon (: 21:24

Uh-huh.

James Cahill (: 21:24

it it does build quite the insulation barrier around the rest of the world. but with you know your kind of lead there, right, the Fed

Had things been a little different, we were at that two-handled. The Fed may actually have had the chance to cut rates. So again, going back to the beginning of this year, we were actually in the exact same spot, right? So we were 3.5 to 3.75 as the federal funds rate. But the expectation was to hold rates, but we were leading about a 40% chance to cut by March, and we were.

leading much further, 60, 70%. Looks like a cut was coming for April, May. Now, once we got through February, once the war started, that view of a cut coming really dried up pretty quick. By April we knew it wasn't on the table. and by now of course we are looking at rate hikes. That really started bleeding in in June, seeing hey, this is going to last a bit longer, inflation is moving the wrong way, so we're going to have to do

Something about this rate wise.

Jim Glennon (: 22:32

All right. So we have the new Fed coming in. Let's talk about that. I mean, that's that's been a point of I mean, it's a historical change, right? Anytime a a a Fed chair or a Fed administration turns over, we have just a different view potentially on the economy and how the Fed can influence all these things. We have a different a different level of transparency. We have a different kind of attitude that either focuses on price stability or jobs or

Or both equally, although it's it's probably debatable in previous administrations which one was focused on more. what have we experienced so far and what are some of the considerations going forward of this this Kevin Walsh Fed?

James Cahill (: 23:15

Yeah, I mean the the real big item with Walsh is the communication, right? He he said, Hey, I I'm going to try and speak to the market a little bit less. I don't want the market guessing what the Fed is doing. I want the market considering what the market is going to do. So, you know, he's got a couple of committees that are going to be looking into different ways to view PCE, different ways to view the jobs numbers, right? He's going to do a little bit of rework.

The Fed. I think that generally that is very welcome. A lot of people are excited to see some new ideas coming in, but the communication is the biggest change from my point of view. It really harkens back to Alan Greenspan, who passed away earlier this year. but he was not a big communicator outside the Fed. Or when he spoke, it was, you know, notably incomprehensible, was what people said. he tried to make

it very thick so that.

Everyone could hear what he was saying, but not really what it was going to mean for the market. I think Warsh is going to go a little bit quieter, just less communication. Jim, do you have an opinion

on, you know, lots of communication, little communication as a you know, manager yourself?

Jim Glennon (: 24:28

Yeah, I mean, I am a big fan of communication, even over communication, whether you're managing people or processes or in this case, you know, the world economy. I remember the Greenspan years. That's gonna age me a little bit, but I remember, you know, kind of how the markets viewed every little thing or even just an eyebrow twitch of that administration, the Greenspan administration. As you said, spoke very little. So the the market still though.

Investors still spent a lot of time and energy trying to guess what the Fed was thinking and how they were going to react to numbers, despite the best efforts to communicate very little. Then you have Bernanke and Yellen, who are very much kind of changed the tide. They said we're gonna we're focused on two percent for inflation and you know four and a half percent for full employment. And they were a lot more transparent about the dot plot and who was thinking what and who was dissenting and what the kind of what the mood of the Fed was. And I think that worked.

fine as well. I don't I don't know that there's I have a very strong conviction one way or the other, but I can say that I think what Warsh is trying to do has been done before and it was again it worked fine, but the investors are not going to look the other way. They're always going to wonder what the Fed is going to do because the Fed has so much influence on interest rates and money supply and therefore the US economy and by extension the whole world economy. So I think I think this will probably end up just being a new normal that we will

adjust to very quickly. And again, people are still going to look for the the eyebrow raise or the slight change in statement language because statements are still going to come out even if they're sh much shorter. I don't know. What do you what do you think, man?

James Cahill (: 26:13

I always felt, you know, post 2008, post-Alan Greenspan, the the whole point of communicating more was to try and help avoid any future issues, right? Any confusion with what the Fed might do, any confusion with where rates might go, any confusion with

the the mood. now, you know, we are not in the

environment that we were in: 2008

Jim Glennon (: 26:46

Mm-hmm.

James Cahill (: 26:47

we're all in this big water gun fight together and there's a guy with you know five gallons in a bucket and at any time he's gonna throw it at one of you.

It makes

Jim Glennon (: 26:56

Yeah.

James Cahill (: 26:57

some sense to pay attention to that guy, right? Like anything the Fed does is going to influence the market so much. You you could say as much, you know, I want you guys to focus on each other as as you want. They're always gonna be staring at you. You know, it's impossible to get away from. So I think just communicating makes sense, but we'll see. You know, it it

went for you know twenty odd years with Alan Greenspan. It it was fine for the longest time. So it's probably gonna be a non-issue in the longest of runs.

Jim Glennon (: 27:28

Right. Yeah, it's i interesting and good you brought up two thousand and eight, like the environment is very different now. Whereas in two thousand eight I think the market needed that confidence of knowing exactly what the Fed was thinking because we were in a real rough spot economically and jobs wise and the markets were still feeling the effects of the credit crisis. So if we if we find ourselves in another tense or you know, recession like or even depression like situation.

I think the the people are gonna wanna know more about what the Fed's thinking versus this elephant in the room situation where yeah, you could easily have a a bucket you know over your head that's about to fall and you that it'd be better to know about it than try to guess what the next move is.

Okay, we talked a little bit about tariffs earlier, but just anything to clean up there. Just I mean, it's been a wild ride there as well for almost it it feels like longer. It's really been just over a year, right, since the big announcement Liberation Day.

we

all knew tariffs were coming, but that was the day that that they hit us over the head with it, right?

James Cahill (: 28:42

Yeah. I'll I'll definitely remember that day for a long time. I don't really mark it. but

Jim Glennon (: 28:47

Yeah.

James Cahill (: 28:47

I I think the only thing to clean up there is, you know, these are under a different ruling. Section three one is a little bit more battle tested.

But this is the Trade Act of: 1974

Jim Glennon (: 29:24

Makes sense. I mean, w we've talked about it a lot. It's not lost on anyone that this administration had been working on a lot of these initiatives that they're undergoing right now, is including tariffs. They've been thinking about this for years since the previous Trump administration, in you know, the 2016 administration. So they've they have backup plans to backup plans. So even if these get shot down, these nineteen seventy four

tariffs we're likely to see j yet another round under a different name throughout the other two and a half years of this administration.

James Cahill (: 29:59

I I would say I would absolutely bet on there will be some form of tariff for the next two years, right? Like can you imagine the day that twenty twenty eight, whoever is elected next is coming in and there is not just some form of tariff in place or you know, in the court or in discussion. It's going to be the the one of the key pieces of this administration two years prior, two years moving forward.

Jim Glennon (: 30:26

So I think should we talk rates? Rates this year. I mean, it's it's kind of a sad story, I guess, for the mortgage people.

James Cahill (: 30:33

Yeah.

Jim Glennon (: 30:34

If you are talking first half of the year, it we had one of those sweet small refi booms happening. We saw a five handle on the thirty year fixed conventional, which is amazing. We saw the spread between mortgages and the ten year drop to two percent, which is held in.

The spread has held in, but we've we've seen a half point hike in rates on mortgages since the beginning of the the year, or since really the war started. That was the was the catalyst. We would likely be in a different environment volume-wise right now if we had maintained rates below five percent. But somehow we've still maintained a really good level. Like this year has been the best year for many of our customers and many lenders in the industry since.

Call it twenty twenty two when rates skyrocketed, you know, from three percent to over seven percent over that next kind of eighteen months. So sort of a sad story with a with a bit of a silver lining in that is that that we have seen a housing market that's fairly resilient, even if there's still a dearth of supply out there. Folks are just moving. They're they're moving their houses, they're selling them, they're buying that the because of all the Ds that we've mentioned,

And th there's like eight D's now, divorce, death. I forget there there's a bunch more that are super creative, but life is just going on, right? As is expected. So we're s we continue to see double digit increases in volume in terms of percentages every year, despite where we are with today with rates.

James Cahill (: 32:12

Yeah, and optical blue is actually our data was used in a Wall Street Journal article about a a week ago just mentioning that the volume of mortgages that individuals locked to buy homes, it rose to its highest level in more than three years this past June.

Jim Glennon (: 32:28

Mm-hmm.

James Cahill (: 32:29

So while the year started out a little bit sluggish, it is actually like locking wise, it's been improving. So there's been a more and more volume coming in. You and I were discussing right before we hopped on. It's been it's been pretty

Quick, volume wise.

Jim Glennon (: 32:45

Mm-hmm. Yeah. No, that was a great article. Shout out to our associate Brendan O'Connell, who was consulted on that on that article. He did use some good optimal blue data to get just get people thinking. Cause it again, you look at lock volume, that's always a leading indicator of actual transactions, right? Purchases or refinances. And and yeah, again, we're seeing pretty good numbers there. You know, we mentioned rate spreads. That's a huge reason we're seeing

Better rates right now. I think Logan Motoshami points this out a lot on LinkedIn. I think it's worth noting over and over again that three years ago the spread between treasuries and mortgage rates was three percent, which would mean we'd be at like seven point six right now if those spreads held in. But due to a lot of factors, including supply demand and some of the stuff we talked about earlier, which is just the fact that rates are expected to be higher for longer, meaning that mortgage bonds are not expected to pay off very quickly.

Typically that's why you get a premium, you get a higher rate on a mortgage bond versus a treasury, is because mortgage bonds have a callability option, basically. It's it means borrowers can refi whenever they want, whereas the federal government does not tend to refi out of a 10-year loan. But that has shrunk to 2%, a whole hundred basis points, which is a massive contraction. So that's why we're seeing closer to six and a half percent today than seven and a half, which again, I think that's also continuing to keep.

Some refines moving along, some cash out refines. People want to take money out of their homes. They're still able to get a rate that could be lower than what they borrowed at two, three years ago. When spreads wider.

All right, what else do we have, James?

James Cahill (: 34:28

I feel the the only other one for this year in review is jobs. And you know, it like a lot of this data, the inflation data is not totally positive, but jobs is it's been the opposite story, right? looking back to the fall, this past year, I I remember jobs for it's coming in pretty bad. I I remember the word anemic being used to describe some of them. So starting the year off, you know it was January, we had like a hundred and thirty K gain in the employment. Unemployment was

sitting at 4.3%. While that number has only ticked down to about 4.2% as of the last one. we've gained something like 500,000 jobs over the past few months. So it is a it's a positive story. People are are getting hired. Unemployment is moving in the right direction. And especially with everything else that is happening, it's you know you can only imagine what it could have been, but it's still the

The bright star in this story.

Jim Glennon (: 35:30

Mm-hmm. Yeah. Jobs numbers continue to be good. Kind of again doesn't bode well for rates, but bodes well for the economy, even if the numbers are relatively small in terms of jobs that are added. We're still just seeing that unemployment rate stay relatively low. And that's some of that is still the migration story. Migration patterns have have reversed under this administration, our population growth has slowed essentially.

doing a lot of things, migration being a huge one. Birth rates also, which we could spend a whole month on podcast talking about. Birth rates in this country have hit I believe an all time lower, very close to it, where we're just not we're not replacing humans fast enough, right? To to keep up. So we don't need that many jobs to keep the economy limber.

Yeah, I guess the only other thing I would, you know, we talk about here and I think is worth focusing on, and it's been pretty heavy in the news lately, is just the the supply of debt that is out there. That's a big floor under rates right now. It's been a floor under rates for for a long time. Whether it's sovereign debt, you know, government debt like we have, we're we're at all time highs in terms of how much money the the US is borrowing to finance operations.

Many other countries are it are experiencing the same thing. The European nations are are rearming themselves with some of the r requirements around NATO and how much of your GDP you put into to military spending. And then the AI play, right? And we've seen seen it recently where there's been some some nerves, some nervousness around some of those stocks, and a lot of that has to do with the amount of capital and debt.

that's needed to finance some of these data centers, the energy that is needed to power those data centers. I mean, those numbers are have just always been staggering. Like how do you borrow half a trillion dollars? I I you can't wrap my brain around that. But that money has to go come from somewhere. Those bonds have to be sold somewhere. So there needs to be this this demand for this debt in addition to US Treasuries, in addition to mortgage bonds, right? It's just it's kind of staggering that that rates are where they are even with that sort of

volume numbers behind all of it. Anyway, that's a that's another story to keep an eye on.

James Cahill (: 37:51

Yeah, I always think of, you know, with the AI companies issuing more and more debt, right? Your cost of debt is cheaper than the cost of equity because it's tax deductible. So you can get away with that for longer, but it is still an expense. And at a certain point, your cost of debt is cheaper, but as long as your PE ratio is high enough. And you know, the AI companies have been enormously valued by their PE ratios, but as you take on more and more debt, you have to pay it back.

So that payment is going

Jim Glennon (: 38:22

Mm-hmm.

James Cahill (: 38:22

to lower your earnings. so it can make the equation worse. And slowly it's gonna erode away until you know you don't have a very good balance anymore, and these companies are discounting at a high rate. So it's it's interesting how you would we've watched the financing go from so much coming in to so much switching to debt, issuing these bonds, and now the debt is

As always it becomes, well, why do we have so much debt? This is a big question. Is this, you know, sustainable? Same thing we ask on

sovereign debt.

Jim Glennon (: 38:57

Yeah, that's a that's an excellent point. And the math is what it is, right? If you're paying five, six, seven, eight percent on half a trillion dollars, like that's that is billions of dollars in debt that you need to pay down every year and that has to come from your earnings and you have to keep up with that, that's how companies fail when they're trying to grow very quickly as they get in over their head with debt and then whoever owns that debt kind of le is left holding the the proverbial bag.

All right. Anything else, James?

James Cahill (: 39:29

No, you know, the FMC this week. watch out for it. Let's hear if Walsh he might even choose not to talk, but let's listen to what he has to say and see if we can't gleam anything about the future.

Jim Glennon (: 39:42

Agreed. Agreed. Should be at least interesting. It's only a second one. So we'll see how the how long the statement is versus previous ones versus previous administrations and maybe try to figure out which way they're leaning, even though we're he'd rather we didn't do that.

James Cahill (: 39:58

He can't stop me, so

Jim Glennon (: 39:59

That's true. All right, James. Great conversation as always. Thanks for rapping with me. Talk again next week.

James Cahill (: 40:08

Thank you, Jim.

Jim Glennon (: 40:10

And that's it for today. Join us next week for another episode of Optimal Insights, where we'll continue to provide you with the latest market analysis and insights to help you stay ahead. Check out our full videos on YouTube. You can also find each episode on all major podcast platforms. Thanks again for tuning into Optimal Insights.