Securitization Weekly Overview: Market (Not Fed) Hikes Rates: Carry Giving Way to Duration

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Securitization Weekly Overview

Market (Not Fed) Hikes Rates: Carry Giving

Way to Duration

Fed stays on hold; markets fade dovish messaging

31 July 2026

This week's key event was not the Fed holding rates steady, but the market tightening

financial conditions on its own. Chair Warsh's press conference was viewed as

insufficiently focused on persistent inflation, prompting investors to question the Fed's

commitment to restoring price stability. The result was a twist-steepening Treasury

curve: long-end nominal yields and breakevens rose sharply, while short-end yields fell as

markets priced out near-term tightening. Notably, this diverged from BofA's economics

and rates teams, which still expect three additional Fed hikes this year. With the 10-year

Treasury at 4.74%, just 6bp below the key 4.80% technical level, investors increasingly

see the market, rather than the Fed, as the primary source of monetary tightening

Chris Flanagan

FI/MBS/CLO Strategist

BofAS

Securitized Products Strategy

United States

Alvin Fung

ABS Strategist

BofAS

SP carry still attractive; rising risks = greater caution

We remain constructive on securitized credit and favor higher-quality floating-rate

exposure across agency CMOs, non-agency RMBS, ABS, SASB CMBS, and senior

corporate and CRE CLOs, while remaining underweight agency MBS basis risk. ABS

spreads remain supported by moderating issuance and solid demand, CLO collateral

quality continues to improve, and CES/HELOC deals remain preferable to comparable

Non-QM risk given stronger collateral performance. However, carry trades are becoming

more vulnerable as markets enter the seasonally weaker (for risk) August-October

period. HY spreads and rate volatility have begun to rise, while geopolitical risks remain

elevated. The potential for further escalation in Iran, alongside tighter gasoline markets

and higher oil prices, could push inflation expectations and rate volatility materially

higher ahead of Jackson Hole. As a result, investors should become more selective,

focusing on structural protections and higher-quality carry rather than broad spread

beta.

Duration more compelling: yields approach key extremes

…