The Daily Tearsheet

Stocks are higher this morning after the midterm results. Bonds and MBS are up.

As expected, Democrats swept the midterm elections as voters rebuked Trump for being Trump. Tariffs and Iran were the main catalysts. What does this mean for markets? Not much. Nothing was getting passed legislatively before and the Democrats will probably spend the next two years investigating their political enemies and passing messaging legislation that will get vetoed.

Yesterday’s vote resembles the voter rebuke in 94 against Clinton, 2006 against Bush and 2010 against Obama. Midterm results like this are voters expressing dissatisfaction with the current state of affairs. Trump is officially a lame-duck at this point and it will be interesting to watch how he reacts to that. The substance probably won’t mean much. If there was any plan to release the GSEs that isn’t happening since legislation won’t be happening.

Voters passed some 29 measures yesterday restricting data center construction. It is clear that voters are concerned about AI and its impact on jobs (the objections about noise, environmental issues, water etc. are just fig leaves – the real issue is job losses).

There is some $500 million of AI and data center debt already out there and the costs of servicing that debt are going up. If we get a tightening of credit and financial stress, it is is probably going to come from there. Credit default swaps are signaling problems in some areas of this space, and I can’t imagine the recovery value of a half-built data center is all that much. Credit problems in general mean good things for the origination space as investors seek out safe harbor in government-guaranteed MBS and Treasuries.

We have retraced nearly 80% of the September / early October increase in rates. Since there wasn’t any real catalyst to drive them up, there isn’t one pushing them back down. Regardless, it is helpful for the real estate industry and makes 2027 forecasts look a little better.

With the midterms out of the way, the focus turns to Friday’s jobs report. The Street is looking for 62,000 jobs and a 4.2% unemployment rate.

There were 7.5 million job opening at the end of September according to the JOLTs jobs report, which was a decent increase from August’s 7.1 million number. Hires rose from 5.27 million to 5.4 million. The quits rate rose from 1.9% in August to 2.1% in September, which is usually a precursor to higher wages. The quits rate jumped in construction from 1.8% to 2.4%.

The private sector added 86,000 jobs in October according to the ADP Employment Report. Trade / Transportation / Utilities saw a 39,000 increase in jobs while Professional / Business Services saw a 27,000 decrease. Education / Health Services rose 28,000.

Pay rose 3.2% overall, with a 3.0% bump for job-stayers and a 4.8% increase for job leavers. Construction and manufacturing saw the biggest increases.

“Employers of all sizes were hiring last month, and our data suggests that job changers were lured by a combination of bonuses, overtime, and more hours in addition to higher base pay,” said Dr. Nela Richardson, chief economist, ADP. “Taken together, earnings growth for these workers hit its fastest pace since March 2024.”

Redwood Trust announced earnings and its conversion from a REIT structure to a C Corp. Shareholders will be able to exchange their shares for 11% preferreds and the company slashed its quarterly dividend from $0.18 per share to $0.02. REITs are required to distribute 90% of their net income as dividends, so this limits their ability to re-invest in growth and that is one of the reasons why Redwood is converting. They also believe it will help lower their cost of capital. The Street saw the dividend cut coming as the stock was yielding over 20%, and those sorts of yields never last. Book value per share fell 5% to $6.56. The stock is getting slammed this morning, down over 9% after losing 4% yesterday. It is currently trading at 42% of book value per share.

“The third quarter of 2026 was among the most challenging for our industry since the onset of the COVID-19 pandemic. We prioritized liquidity while maintaining strong returns in mortgage banking,” said Christopher Abate, Chief Executive Officer of Redwood Trust. “We distributed $8.8 billion of mortgage loans during the quarter, while continuing to serve our seller network. In aligning our corporate structure with our business model going forward, we can leverage our competitive advantages and continue growing market share—a major strategic priority as housing inventory for sale hits multi-year highs and the need for purchase-money mortgages potentially rises.”

Sequoia originated $5.1 billion in loans, which was similar to the same quarter last year and 9% lower than the previous quarter. Aspire originated $1.1 billion, well below the $2.1 billion originated in the previous quarter. There were rumors at the MBA conference in Chicago that Aspire was “pulling back” and that appears to be the case.

Non-QM MBS spreads have been widening, and a graph in Redwood’s presentation shows the AAA tranche of non-QM RMBS has shot upward. Remember, these are spreads, so they tack onto the overall increase in rates:

I suspect the post-October increase is being driven by falling rates and stagnant RMBS pricing. As volatility in the bond market falls, we should hopefully see some improvement in spreads. As investors found out the hard way in Q3, non-QM loans have some serious negative convexity.

Mortgage applications fell 1.2% last week as refis dropped 0.1% and purchases fell 2%. Mortgage rates fell, but so far it hasn’t translated into increased volumes. “Mortgage rates drifted down to their lowest level since September 2026 last week in the wake of the Federal Reserve’s decision to hold on additional rate hikes at its October meeting,” said Mike Fratantoni, MBA’s SVP and Chief Economist. “While the 30-year rate declined to 7.3%, activity is still quite slow, with purchase application volume down for the week and refinance volume effectively flat at a very low level. As we have highlighted in recent weeks, more borrowers are choosing ARMs in this environment to lower their initial payments, with the ARM share at its highest level since September 2025.”

Stocks are lower after disappointing numbers out of Apple. Bonds and MBS are down small. Oil is up a touch after military operations overnight.

Voters head to the polls today to determine control of Congress. Given that midterms usually favor the party that doesn’t control the presidency, Democrats should do well. Some of the business press thinks that a Democratic sweep should be negative for stocks, but I struggle with that assessment. Stocks are overvalued and ripe for a fall, but it won’t be politics driving it. If Democrats take both the House and Senate, they will almost certainly impeach Trump, but won’t have the 67 votes in the Senate to remove him. So there will be a lot of sound and fury from investigations and a lot of messaging legislation that will go nowhere.

Impeachment and investigations will prevent any possibility of bipartisan legislation which means more of the same. That said, gridlock is generally good for stocks so I am not seeing the bear case based solely on politics. There are other good bear cases, but this isn’t one.

The manufacturing economy improved in October according to the ISM Manufacturing Report. New orders rebounded after 4 consecutive months of contraction. Production also increased. The Price Paid index fell which indicates pricing pressures are abating.

“In October, U.S. manufacturing activity remained in expansion territory. Of the five subindexes that make up the PMI^®, four (New Orders, Production, Supplier Deliveries and Inventories) grew faster than the previous month, while Employment growth slowed down by 0.3 percentage point. In October, general sentiment got worse for a third month in a row, with 34 percent of the comments positive and 66 percent negative (a 1-to-2 ratio of positive to negative sentiment). Among negative comments, pricing volatility was mentioned in 62 percent, longer lead times 41 percent, tariffs 25 percent and the Iran war 21 percent; most comments mentioned multiple factors.

The comments were generally surly, with manufacturers expressing frustration with lead times, prices and uncertainty out of DC. Data Center construction is causing an insatiable appetite for commodities. The percent of manufacturing in strong contraction increased to 6% however.

Construction spending declined 1.9% MOM and 1.7% YOY in September according to the Census Bureau. Residential construction was down 5.5% MOM and 8.8% YOY. The decline is in both multi-family and single-family.

Office (which includes data centers) rose 5.5% MOM and is up 33% YOY.

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Thank you to everyone who met with Western Alliance Bank at MBA’s Annual Convention & Expo 2026 in Chicago! Western Alliance Bank’s Specialized Mortgage Services Group appreciated the opportunity to connect with the mortgage industry in person to exchange insights and discuss the challenges and opportunities shaping the industry today. These conversations reinforce the importance of Western Alliance’s approach, bringing mortgage lenders the strength of a leading national commercial bank and the personalized relationships from bankers who offer specialized expertise and the ability to respond quickly as market conditions evolve.

While at MBA Annual, Mark Short, National Sales Manager, Mortgage Warehouse Lending, and Chris Martin, Director, Treasury Management Sales, sat down with HousingWire to discuss how Western Alliance is helping mortgage lenders strategize through uncertainty, access liquidity and position themselves for growth.

During the interview, Short highlighted Western Alliance’s leadership structure and how the bank’s commitment to the mortgage sector helps the bank respond quickly to clients’ changing needs. “Our C-suite leadership is heavily involved, so when something happens in the industry, we can move quicker than [just about] any other bank.”

The conversation also explored the bank’s ability to deliver flexible financing solutions and its investments in payment technology to support the evolving needs of mortgage lenders. Through customized mortgage warehouse lending, MSR financing, note financing and treasury management solutions, plus a whole loan trading desk focused on purchasing scratch-and-dent loans (send bid requests to SnD@westernalliancebank.com), Western Alliance brings a comprehensive approach to serving clients across the mortgage ecosystem.

Read the full HousingWire article and watch the interview, or watch on YouTube. Connect with the Specialized Mortgage Services team at Western Alliance Bank, Member FDIC, to continue the conversation and explore how Western Alliance’s banking advisors can help your business adapt, grow and capitalize on opportunity.

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The sell-off in tech stocks has dampened expectations for Anthropic’s IPO valuation. Estimates have fallen from roughly $2 trillion a few months ago to closer to $1.5 trillion. Anthropic reported quarterly revenues increased to $17 billion from $11.6 billion in the prior quarter.

One potential fly in the ointment for Anthropic has been the behavior of AI-related debt. Credit default swaps for AI companies like Coreweave have blown out to 1100 basis points. Oracle and Softbank swaps are out some 300 basis points as well. It appears that stocks are noticing the action in the bond market and valuations are coming back to Earth. Despite the widening of Oracle spreads, the company announced a shelf offering of equity and debt on Monday.

There is about half a trillion worth of AI and data center debt outstanding.

The week ahead will be dominated by the jobs report on Friday. We will also get ISM data and consumer sentiment. Oil is down after reports that Trump wants to try diplomacy again with the Iranians.

The midterm elections are on Tuesday and could potentially impact markets, but that is unlikely. The most likely scenario is that Democrats win the House and possibly the Senate, which means gridlock. Democrats in the House will spend the next two years investigating and impeaching Trump which will foreclose any possibility of bipartisan legislation.

A lot of tech bellwethers got slammed on disappointing earnings last week. We are in the heart of earnings season, with companies like Apple, Champion Homes, LGI Homes, Redwood Trust, Lending Tree, Loan Depot, Angel Oak, Finance of America, Equity Residential, American Homes 4 Rent, Zillow, Radian, MFA Financial, and UWM.

Employment costs increased 0.8% for the third quarter, according to BLS. Salaries rose by 0.7% while benefit costs rose 0.9%. For the full year, salaries rose 3.1% while benefits rose 3.9%. The ECI for the full year ending 9/30 rose 3.4%. Health benefit costs rose 6.4%.

Dallas Fed President Lorie Logan advocated for two more rate hikes in a speech on Friday.

Economic growth is strong. Consumer spending is solid, especially among wealthier households that have benefited most from the soaring stock market. And business investment is robust. While data centers get the headlines, manufacturers, defense contractors and energy companies are also ramping up investment.

A growing economy creates jobs, and the labor market is balanced and perhaps tightening a bit. Unemployment continues to hover just above 4 percent. That is down slightly from late last year and close to most estimates of the lowest sustainable level. On average, employers are adding at least enough jobs each month to absorb trend growth in the labor force.

Turning to price stability, the FOMC aims for an annual inflation rate of 2 percent as measured by the price index for personal consumption expenditures, or PCE. We have missed that goal for nearly six years. While inflation has come down from the post-pandemic peak, it is not yet headed all the way back to our target.

And skipping a meeting does not change the monetary policy destination. Indeed, by making the destination clear, the FOMC can better help the economy adapt and obtain the promised benefits of a skip. It remains clear to me, given the current outlook, that the FOMC needs to implement at least two more 25-basis-point rate increases. After that, it would make sense in my view to pause and examine economic and financial developments to determine what further action may be appropriate. The end goal should be to make policy modestly restrictive so we can sustainably deliver both maximum employment and stable prices. Of course, I will change my policy views if the economic outlook and risks change.

Odd that she sees the labor market tightening a bit after Microsoft offered buyouts to over a quarter of its labor force. We are seeing big job cuts in tech, and nobody is unaware of the cuts going on in finance, particularly mortgage banking.

Data center construction has been a big driver of the economic growth this year, and all the signs are pointing towards less construction going forward. Credit spreads are widening on data center debt and the politics of data centers mean more regulatory red tape. The costs of data center construction are rising.

The Fed Funds futures now have a roughly 25% chance that the Fed won’t hike in December, which is the highest in a while. That said, the March 27 and June 27 contracts do predict two more hikes as the base case.

The Chicago PMI dropped 3.5 points to 55.3 in October as supplier deliveries, production, new orders and backlog fell. Employment increased however. Supplier deliveries fell to the lowest level since February. while employment hit the highest level since April 2021.

Unfortunately, prices paid rose 8.9 points to the highest level since December 2021.

Stocks are lower after an earnings miss from Alphabet (Google). Bonds and MBS are up small. The European Central Bank maintained rates at current levels. ECB President Christine Lagarde will step down in February.

As expected, the Fed maintained the Fed Funds rate at current levels. There were two dissenters – Cook and Hammack who wanted to raise by 25 basis points. “Economic activity is expanding at a strong pace. While uncertainty remains elevated owing, in part, to geopolitical developments, domestic spending has been resilient. Productivity growth is strong, and capital investment is robust. Job gains have kept pace with the workforce, and the unemployment rate has changed little. Inflation remains elevated. The accumulation of more information will help the Committee determine the policy stance appropriate to ensure a timely return of inflation to the Committee’s 2 percent goal. The Committee will deliver price stability.”

During the press conference Kevin Warsh said that starting next year, one of the Fed meetings will not discuss monetary policy but will focus on other strategic issues. Beginning in 2028, there will be two meetings that won’t concern policy.

The comments about the economy and the labor market are interesting with the backdrop of Microsoft offering buyouts to 27% of its workforce. Lots of people are employed in data center construction, but the pace of construction there probably isn’t sustainable given political opposition and the increasing cost of financing them.

The takeaway from the meeting is that a December hike is pretty much a lock, and the Fed Funds futures see a 86% chance they raise rates at the end of the year.

Trump was obviously mad that the Fed didn’t cut rates, but Treasury Secretary Scott Bessent expressed confidence in Kevin Warsh: “I think Chair Warsh is off to a great start,” Bessent said. “As I often say, I have great confidence in him.” When asked if a December rate hike would be a policy mistake, he said “That’s not necessarily so.”

At this point, the markets are ignoring Trump and viewing it all as a sideshow. Reminds me of the legendary Earl Weaver and Bill Haller in 1980.

Baltimore Oriole’s Earl Weaver argues with Umpire Bill Haller in 1980.

Personal incomes rose 0.2% MOM and personal outlays rose 0.5%. The incomes number was a touch light. The all-important PCE Price Index rose 0.5% MOM and 3.6% YOY, while the core rate rose 0.3% MOM and 3.1% YOY. Inflation ticked up in September versus August:

Home prices rose 0.3% MOM and 2.4% YOY according to the FHFA House Price Index. The next FHFA Home Price Index report will set the conforming loan limits for next year, though a few lenders have already put out estimates. You can see the divergence between the different regions below. The Midwest is where the action is, while the West Coast is struggling.

Note the Middle Atlantic contains the New York City MSA which also hot these days.

Consumer confidence rebounded from very low levels in October according to the Conference Board. The index rose 7.5 points to 91.7. “Consumer confidence advanced in October, driven primarily by improved perceptions of current and expected business conditions,” said Fergus McCormick, Senior Economist, Global Indicators, The Conference Board. “The recovery was in line with retail gasoline prices easing from September to October. Yet, despite the increase in October, consumer confidence remained on the long-term downward trend that’s persisted over the past few years. Consumers planned less spending on services and durable goods over the next six months. This likely reflected higher price levels and persistent inflation, which eroded consumers’ purchasing power.”

Consumers continue to be frustrated with rising costs, especially energy. Given that heating oil and diesel are essentially the same thing, I expect consumers in the Northeast will be particularly surly this year.

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During the MBA Conference, there was a lot of chatter about non-QM loans and speculation that some aggregators lost money during the month by being underhedged. I wanted to take a look and see if that was true. If you aren’t a secondary guy you will probably find the following of limited use.

A typical mortgage banker hedges a pool of Fannie / Freddie or Ginnie loans with TBAs. Non-QM aren’t deliverable into TBAs so the lender needs to think about duration, which refers to a loan’s expected life and its interest rate sensitivity.

During September, rates moved up violently, and many lenders with lower-coupon non-QM loans found they were unable to find an attractive bid for them. Basically anything with a coupon below 7% was highly unattractive to the buy-side due to extension risk and pricing was hit hard.

Below is a snippet from a well-known NQM correspondent’s DSCR rate sheet on 8/31 and 9/30 for a few coupons. You can see how much the lower note rates got slammed (the last column):

Below is a table of the Eris SOFR Futures prices based on 8/31 and 9/30 prices

The lower coupon 6.5s probably have a duration of 10 years while the 8s have a duration of 5 years or lower. If you have a Bloomberg terminal you can calculate them directly, or your broker-dealer may be able to give you an estimate. Knowing the duration of the underlying loans is a critical component to hedging non-QM loans, and getting this wrong will affect hedging performance.

Below I looked at how the Eris SOFR futures performed as a hedge for these loans. The 6.5 loan had a 10-year hedge, the 7 had a 7 year, the 7.5 had a 5 year, and the 8 had a combo of 5s and 2s.

The lower coupons struggled and shows why lenders may need some out-of-the-money options to hedge the tail risk of a big move. But for most coupons, the hedges were within 25 basis points.

If you have any questions about hedging non-QM with Eris SOFR futures, please contact John Douglas or Geoff Sharp at Eris Futures.

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The single family rental market is humming along, according to earnings from single family REIT Invitation Homes. Total revenues rose 6.3% while rents rose 3%. The occupancy rate was 96.4%. Due to the new institutional investor limits on single family homes, Invitation is selling parts of its portfolio and buying back stock with the proceeds.

Stocks are flattish as we await the Fed decision. Bonds and MBS are down small.

The Fed decision is due at 2:00 pm EST today. Kevin Warsh will hold a press conference afterward. The market is looking for a hawkish pause, where the Fed maintains policy but signals further hikes ahead.

New Home Sales fell 0.6% MOM and 5.3% YOY to a seasonally adjusted annual rate of 680,000 units. At the end of September, there were 476,000 new homes in inventory, which represents a 8.4 month supply. The median new home price fell 3.9% YOY to $400,400.

The inventory of new homes for sale is still elevated:

Housing isn’t going to be much of a contributor to GDP growth until some of this inventory gets worked off.

Microsoft is offering buyouts to about a quarter of its global workforce – 60,000 employees in all. The company is expected to report earnings today. Capital expenditures for AI are taking a toll on the company’s finances, so it is cutting its workforce aggressively. I wonder if Microsoft is the first salvo in tech downsizing. If so, we could see the labor market break out of its low hire / low fire equilibrium and weaken.

Home prices rose 2.1% YOY according to the Case-Shiller Home Price Index. The hip-to-be-square trade continues with Chicago seeing the biggest gains and Seattle seeing the biggest losses. Real, inflation-adjusted home prices continue to decline, however affordability remains stretched as incomes haven’t caught up with the 2022 spike in prices and mortgage rates continue to work their way higher.

Mortgage applications rose 3.4% last week as purchases rose 4% and refis rose 3%. “Mortgage rates declined for the second week in a row, with the 30-year fixed rate decreasing to 7.37 percent, the lowest in three weeks. The decline in rates gave borrowers some relief, with applications rebounding slightly, particularly conventional applications,” said Joel Kan, CMB, MBA’s Vice President and Deputy Chief Economist. “Mortgage rates are still more than a percentage point higher than the same week last year and most homeowners still have rates much lower than prevailing market rates. The ARM share of applications increased to 11.3 percent, the highest level in more than a year, as more borrowers applied for ARM loans to lower their monthly payments.”

Purchase applications are down 18% YOY while refis are down 60%.

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During the MBA Conference, there was a lot of chatter about non-QM loans and speculation that some aggregators lost money during the month by being underhedged. I wanted to take a look and see if that was true. If you aren’t a secondary guy you will probably find the following of limited use.

A typical mortgage banker hedges a pool of Fannie / Freddie or Ginnie loans with TBAs. Non-QM aren’t deliverable into TBAs so the lender needs to think about duration risk, which refers to a loan’s expected life and its interest rate sensitivity.

During September, rates moved up violently, and many lenders with lower-coupon non-QM loans found they were unable to find an acceptable bid for them. Basically anything with a coupon below 7% was highly unattractive to the buy-side due to extension risk and pricing was hit accordingly. Does that mean that the hedges didn’t work? Not necessarily.

Below is a snippet from a well-known NQM correspondent’s DSCR rate sheet on 8/31 and 9/30 for a few coupons. You can see how much the lower note rates got slammed (the last column):

Below is a table of the Eris SOFR Futures prices based on 8/31 and 9/30 prices

The lower coupon 6.5s probably have a duration of 10 years while the 8s have a duration of 5 years or lower. If you have a Bloomberg terminal you can calculate them directly, or your broker-dealer may be able to give you an estimate. Knowing the duration of the underlying loans is a critical component to hedging non-QM loans, and getting this wrong will affect hedging performance.

Below I looked at how Eris SOFR futures performed as a hedge for these loans. The 6.5 loan had a 10-year hedge, the 7 had a 7-year, the 7.5 had a 5-year, and the 8 had a combo of 5s and 2s.

The lower coupons struggled and shows why lenders may need some out-of-the-money options to hedge the tail risk of a big move. But for most coupons, the hedges were within 25 basis points. An important note about duration and extension risk: Duration is not a set-it-and-forget-it number. It changes with rates. This is what happened to the lower coupons. They might have a duration of 10 years with the 10 year at 4.8% and a much longer duration when the 10 year hits 5.3%.

Like any mortgage backed security, non-QM loans have negative convexity and therefore hedged portfolios will be vulnerable to interest rate shocks. Non-QM loans are hedgeable, but they have to be handled differently than conforming loans.

If you have any questions about hedging non-QM with Eris SOFR futures, please contact John Douglas john.douglas@erisfutures.com or Geoffrey Sharp geoffrey.sharp@erisfutures.com at Eris Futures.

Stocks are higher as we begin the FOMC meeting. Bonds and MBS are up small.

The Fed begins its meeting today. The Fed Funds futures are signaling basically a hawkish pause, where no changes are made this month and a hike comes in December. The futures see only a 8% chance of hike tomorrow, but a 79% chance of a hike in December. The proximity to the midterm election is an optics issue and hiking rates will be treated as political, whether it is or not.

The economy accelerated in September according to the Chicago Fed National Activity Index (CFNAI). This is sort of a meta-index of a broad base of economic indicators which gives a 30,000 foot view of the economy. Production-related indicators drove the increase, while consumption and housing were a drag. I suspect this was mainly due to housing, as retail sales were pretty decent and the consumer has been a bright spot in the economy. Employment and sales indicators had marginal effects on the index.

Anthropic filed the S-1 for its IPO yesterday. It certainly makes interesting reading. The market thinks this is a $1.5 – $2 trillion company, with about $19.7 billion in trailing 12 month revenues. There are some 5 different classes of stock as well.

The risk factors section, which usually contains every imaginable risk, has a new one to me at least: “Concerns have been raised advanced AI systems could pose catastrophic or existential risks to humanity”

I have heard of all sorts of ways an investment can blow up, but being an existential risk to humanity is a new one. I can imagine the lawyers discussing whether this should go in the risk factors. “I’m telling ya, Jake, if we blow up humanity and we didn’t disclose it in the prospectus, I don’t even want to think about what the SEC is gonna do to us, let alone Robbins Geller.”

Delinquencies for commercial mortgage backed securities increased in the third quarter, according to the MBA. 4.97% of the loans backing CMBS were delinquent in Q3 compared to 4.82% in Q2. “Overall, delinquency rates for commercial mortgage loans increased modestly in the third quarter. Challenging fundamentals, particularly in the multifamily and office markets, along with higher rates, are having an impact on performance,” said Mike Fratantoni, MBA’s SVP and Chief Economist. “However, delinquency rates remain historically low across most capital sources. The large number of scheduled maturities coming due amidst the recent spike in interest rates will continue to be a headwind for commercial mortgage performance in the quarters ahead.”

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During the MBA Conference, there was a lot of chatter about non-QM loans and speculation that some aggregators lost money during the month by being underhedged. I wanted to take a look and see if that was true. If you aren’t a secondary guy you will probably find the following of limited use.

A typical mortgage banker hedges a pool of Fannie / Freddie or Ginnie loans with TBAs. Non-QM aren’t deliverable into TBAs so the lender needs to think about duration risk, which refers to a loan’s expected life and its interest rate sensitivity.

During September, rates moved up violently, and many lenders with lower-coupon non-QM loans found they were unable to find an acceptable bid for them. Basically anything with a coupon below 7% was highly unattractive to the buy-side due to extension risk and pricing was hit accordingly. Does that mean that the hedges didn’t work? Not necessarily.

Below is a snippet from a well-known NQM correspondent’s DSCR rate sheet on 8/31 and 9/30 for a few coupons. You can see how much the lower note rates got slammed (the last column):

Below is a table of the Eris SOFR Futures prices based on 8/31 and 9/30 prices

The lower coupon 6.5s probably have a duration of 10 years while the 8s have a duration of 5 years or lower. If you have a Bloomberg terminal you can calculate them directly, or your broker-dealer may be able to give you an estimate. Knowing the duration of the underlying loans is a critical component to hedging non-QM loans, and getting this wrong will affect hedging performance.

Below I looked at how Eris SOFR futures performed as a hedge for these loans. The 6.5 loan had a 10-year hedge, the 7 had a 7-year, the 7.5 had a 5-year, and the 8 had a combo of 5s and 2s.

The lower coupons struggled and shows why lenders may need some out-of-the-money options to hedge the tail risk of a big move. But for most coupons, the hedges were within 25 basis points. An important note about duration and extension risk: Duration is not a set-it-and-forget-it number. It changes with rates. This is what happened to the lower coupons. They might have a duration of 10 years with the 10 year at 4.8% and a much longer duration when the 10 year hits 5.3%.

Like any mortgage backed security, non-QM loans have negative convexity and therefore hedged portfolios will be vulnerable to interest rate shocks. Non-QM loans are hedgeable, but they have to be handled differently than conforming loans.

If you have any questions about hedging non-QM with Eris SOFR futures, please contact John Douglas john.douglas@erisfutures.com or Geoffrey Sharp geoffrey.sharp@erisfutures.com at Eris Futures.

Stocks are flattish on no real news. Bonds and MBS are up small.

The week ahead will be dominated by the FOMC meeting on Tuesday and Wednesday. Just after the meeting, we will get inflation data with the personal incomes and outlays report. Other than that we will get new home sales and home prices. We will get earnings from Invitation Homes, Meritage, D.R. Horton, Rocket, and PennyMac. Finally, we will have rate decisions from the ECB and the BOJ which will impact rates.

Market bellwethers such as Google, Amazon and Microsoft will also report this week.

As we head into Fed week, the markets are overwhelmingly predicting no change in interest rates. The Fed Funds futures see only a 9% chance of a rate hike this week. Given the proximity to the midterms, the easy choice is to do nothing.

Consumer sentiment was flattish in October, according to the University of Michigan Consumer Sentiment Survey. Expected business conditions improved while buying conditions for durable goods fell. Inflation expectations for the year ahead rose to 4.7% from 4.6% while long-term expectations bumped up from 3.4% to 3.5%.

Overall consumer sentiment is about 10% lower than it was a year ago and 15% below where it was in February before the war in the Persian Gulf began.

Business activity is at a 5 year high, according to the S&P Flash PMI. “October’s flash PMI data indicate that the US economy continues to boom at the start of the fourth quarter. The output readings from the survey are consistent with GDP growing at a 5% annualized rate after a 4% expansion was signalled for the third quarter. Especially healthy corporate earnings and profits are also indicated, and hiring has surged as companies seek to boost capacity to fulfil stronger customer demand.

If the reopening of the economy after COVID is excluded, recent months have seen the best growth spell for US businesses since early 2015. However, cost pressures remain a key concern, notably as the renewed surge in oil prices reverberates through to impact a wide variety of goods and services. Supply chain bottlenecks have meanwhile intensified, and order book backlogs are growing, making it easier for companies to pass higher costs on to customers. The result is the sharpest increase in selling prices for over four years to a pace that indicates consumer price inflation is likely to rise further above the Fed’s target in the coming months.”

Stocks are lower this morning although the sell-off in tech appears to be taking a breather. Bonds and MBS are down small.

The problem children in the global market are behaving this morning. The French OAT has a yield of 5.05%, just off its highs, while the Korean stock market managed to eke out a small gain in a late day rally. Oil is higher as the Iranians say they are ready to attack civilians and economic targets.

The index of leading economic indicators was flat in September after declining slightly in August. “The US LEI was flat in September. However, due to an upward revision to July’s data, the Index is at a higher level than last month’s report for August,” said Justyna Zabinska-La Monica, Senior Manager, Business Cycle Indicators, at The Conference Board. “Five out of ten components made positive contributions to the LEI in September, led by the interest rate spread and average weekly hours in manufacturing. Nevertheless, these gains were offset by a large decline in consumer expectations and much smaller negative contributions from stock prices, new orders for capital goods and building permits. The LEI’s six-month growth rate increased slightly, which suggests the economy is still growing and will continue to grow, but is becoming less dependent on consumer spending and more dependent on business investment. The Conference Board now expects real GDP to grow by a 2.2% annualized rate in 2026, with our outlook for 2027 at 2.0%, higher than previously forecasted.”

The biggest negative contributor was consumer sentiment (which is often a proxy for gasoline prices) while the biggest positive contributor was the sell-off in the bond market. A sell-off in the bond market means a steeper yield curve, which is often a signal that the economy is getting stronger.

Mortgage REIT Rithm Capital reported earnings per share of $0.39, an increase from $0.04 per share last quarter on a GAAP basis. On a non-GAAP basis EPS fell from $0.60 to $0.55. RTL (residential transitional loans i.e. fix and flip, ground up construction) continues to grow through its Genesis platform. Rithm did its first securitization of RTL loans this quarter.

New Rez saw volume decrease 21% YOY to $12.9 billion. Gain on sale margins were relatively steady at 139 bais points. Rithm bought $1.5 billion on NQM loans for its portfolio and did a couple securitization. The company continues to purchase MSRs.

“Rithm’s strong third quarter results reflect disciplined execution across every part of our platform,” said Michael Nierenberg, CEO of Rithm Capital. “We continued to scale our asset management business, closing new funds and growing a more durable, fee-based earnings stream, while our operating companies delivered: Newrez generated a 24% annualized operating return on equity⁽³⁾, Genesis reached year-to-date originations of $5.0 billion, and Elecor expanded its third-party capital base by executing a joint venture for a core NYC property, while signing 320,000 square feet of new leases. Our businesses continue to perform, and the strength and breadth of our platform position us well as we enter the fourth quarter with significant momentum and opportunity ahead for our shareholders, clients, and partners.”

Stocks are lower as the tech sell-off continues. Good numbers out of Meta and Tesla aren’t enough to pull markets up. Bonds and MBS are rallying.

Just like the bond selloff was global, so is they bond rally. Bunds and Gilts are seeing lower rates. Bucking the rally is the French OAT which now yields 5.1%. MBS seem to be taking this rally with a grain of salt. So far mortgage rates are reluctant to follow the 10 year lower. The recent rally in bonds has recaptured about 25 basis points of the roughly 50 basis point increase since the beginning of September.

Initial jobless claims fell to 194k. The labor market continues to be robust.

Homebuilder Pulte reported earnings this morning of $2.53 per share. Revenues fell 9% and gross margins contracted 140 basis points to 24.8%. New orders fell 6% in units. “The rapid increase in interest rates has stretched affordability even further, made selling an existing home even harder, and has pushed even more consumers to the sidelines,” added Mr. Marshall.“Within this environment, we continue to appropriately balance the price and pace of home sales, align production accordingly, and remain disciplined in our allocation of capital.”

Move-up and active adult now account for over 60% of deliveries, which are the more profitable sectors.

Northpointe announced that it is selling its distributed retail and consumer direct business to CMG Financial, with the transaction expected to close by the end of the year. “Given today’s economic and operating environment, and the continued evolution of the mortgage distribution channels, we are refocusing our strategic priorities where we have the strongest competitive advantages,” Williams continued. “This allows us to deepen client relationships, generate attractive portfolio assets, and grow relationship-based deposits, which we expect will improve operating leverage, capital efficiency and create a more robust, stable and scalable earnings profile…We believe CMG would be a strong home for our origination team and a constructive path for our customers, referral partners and team members,” Williams concluded. “We remain highly committed to the mortgage banking industry, and believe allocating capital and resources to our businesses with the strongest client relationships and balance sheet opportunities provide us the best path forward for long-term growth and shareholder returns.”

Single family rents rose 2% in August according to Cotality. This is the sixth consecutive month of of YOY increases. “August marks an important milestone for the rental market,” noted Molly Boesel, senior principal economist at Cotality. “Annual single-family rent growth returned to its long-run range, albeit at the lower end, for the first time since August 2025, and the number of markets experiencing rent declines fell to its lowest level since September 2023.”

The hip-to-be-square trade continues, with MSAs like Chicago, Philly and NY experiencing the biggest increases while Florida and Texas saw more modest growth.

Stocks are higher this morning after SpaceX earnings. Bonds and MBS are up small. Not sure what caused oil to spike yesterday, but whatever it was, it is over.

As the air comes out of the AI stock bubble, Treasuries seem to be benefiting.

Housing starts fell 5.2% MOM and 11.5% YOY to a seasonally adjusted annual rate of 1.22 million units. The Street was looking for 1.3 million so this is a sizeable miss. Building permits were roughly flat MOM to 1.4 million units. Housing as an economic contributor continues to punch below its weight:

We will hear from a couple of homebuilders this week, and from the sound of it we will continue to see compressing gross margins as they cut price to move the inventory. I am not sure that offering below-market mortgage rates as a way to maintain the comps will work with rates up here. They probably will have to cut price, especially in developments where there are now existing homes coming for sale at lower price points.

Rising rates are impacting pending home sales as well, which fell 7.3% according to NAR. “Market conditions weakened in September due to fast-rising mortgage rates,” said NAR Chief Economist Dr. Lawrence Yun. “Although job growth and income gains can support home purchases, housing affordability is more affected by changes in mortgage rates. Given that mortgage rates have already risen much more than the Federal Reserve’s short-term interest rate hikes, mortgage rates could be topping out. Despite the difficulty of obtaining a mortgage, the limited number of distressed properties is ensuring steady home prices. Buyers and sellers may simply be holding back until mortgage rates move favorably.”

From Yun’s mouth to God’s ears about mortgage rates. As the 10 year stabilizes and bond market volatility eases we should see a tightening of MBS spreads which would move rates lower.

Mortgage applications fell 5.3% last week as purchases fell 7% and refis fell 2%. “Mortgage rates decreased for the first time in over two months, with the 30-year fixed rate dropping to 7.41%. However, lower rates were not enough to boost application activity, as both purchase and refinance applications continued to decline,” said Joel Kan, CMB, MBA’s Vice President and Deputy Chief Economist. “Purchase applications fell 18% behind last year’s pace, as higher rates are pricing buyers out of the market. The ARM share held steady at 10.5%, as ARM rates remained almost a full percentage point lower than the 30-year fixed rate, giving qualified borrowers a lower rate option to purchase a home.”

Mortgage REIT Annaly Capital reported a 11% decrease in book value per share as MBS spreads widened in Q3. “While the third quarter of 2026 was a challenging period for fixed income markets, which we were not immune to, we entered the quarter prepared for the volatility. Our cycle-low leverage and minimal duration exposure provided us with the flexibility to actively manage our portfolio while continuing to make attractive investments across our three strategies,” remarked Chief Executive Officer & Co-Chief Investment Officer David Finkelstein.

Annaly reported that AAA non-QM spreads widened out about 10 basis points during the quarter. They continue to build their servicing portfolio and are valuing it at 6.15x. MSR valuations have continued to march higher.

Western Alliance reported better than expected earnings of $2.45 per share. Credit performance was particularly strong, with nonaccrual loans falling 14% to 0.79% of loans held for investment. Revenues rose 1.9%.

Mortgage origination volume fell 4% YOY to $14.5 billion. Gain on sale margins of 27 basis points were flat QOQ and down 2 bps from last year.