Insights

Market Observation:

The third quarter of 2026 brought renewed pressure on energy prices as supply disruptions associated with the U.S. Iran conflict intensified. During the summer, the Federal Reserve, under new Chair Kevin Warsh, raised its policy rate by 25 basis points the first increase since 2023. At the same time, the 10-year Treasury yield rose above 5% for the first time since 2007, Brent crude returned to approximately $100 per barrel, and U.S. diesel prices reached record highs. With the midterm elections only weeks away, political uncertainty added another layer of risk.

Against this backdrop, markets posted mixed results during the quarter:

  • S&P 500: Gained 2.3%
  • Fixed income: Fell 3.5%
  • Developed international markets: Returned 0.8%
  • Emerging markets: Declined 0.4%

Despite these headwinds, economic activity remained relatively resilient. Annualized real GDP increased 2.2% in the second quarter, following a revised 2.5% increase in the first quarter. Consumer spending, investment, and exports contributed to second quarter growth, while imports increased and government spending declined. Investment including spending on software and other intellectual property products helped support activity amid higher energy costs and tighter financial conditions.

Equity Markets:

U.S. equities posted resilient headline gains in the third quarter of 2026 despite significant underlying dispersion. The S&P 500 rose 2.3% and the Nasdaq Composite gained 2.6%, driving the S&P 500 to repeated all-time highs and a market capitalization of $68.45 trillion. Beneath those records, however, intensifying conflict in the Middle East, sharp sector rotations, and an unexpectedly hawkish Federal Reserve produced a more volatile market environment.

  • Three forces largely shaped market performance during the quarter:
  • Geopolitical conflict and energy shocks: Renewed Middle East disruptions pushed Brent crude above $100 per barrel, adding inflationary pressure to global supply chains.
  • A hawkish Federal Reserve pivot: Persistent energy driven inflation prompted a 25-bps rate increase, while the 10-year U.S. Treasury yield rose to 5.3%, a multi decade high that reset valuations across asset classes.
  • Re-evaluation of capital allocation: Investors placed greater emphasis on corporate capital spending, execution, and near-term profitability rather than speculative multiple expansion.

Fixed Income Markets:

Global bond yields climbed in September as rising energy costs and tighter monetary policy took center stage. The Federal Open Market Committee raised its benchmark rate by 25 bps to a range of 3.75% 4.00%.

The move marked the Federal Reserve’s first-rate increase since 2023, with policymakers noting that it “removed a dose of accommodation.” The hawkish shift pushed yields sharply higher: the 10-year U.S. Treasury yield rose 53 basis points during the month, while the 10-year German Bund and 10-year Japanese government bond yields increased 25 and 13 bps, respectively.

The higher-rate environment weighed broadly on fixed-income assets during the quarter. The Bloomberg U.S. Aggregate Bond Index declined 3.5%, while longer-duration bonds sustained larger losses as Treasury yields rose. Corporate credit also weakened, although high-yield bonds held up better than core and long-duration fixed income because of their shorter duration and higher coupons. 

(MSR) Mortgage Servicing Rights Insights:

The mortgage servicing rights (MSR) market continues to benefit from a highly favorable operating environment characterized by low prepayment activity, strong borrower credit performance, and declining servicing costs. Float income remains a meaningful contributor to returns, supported by elevated short-term interest rates, growing escrow balances, and sustained demand for deposits.

MSR valuations moved higher during the quarter as interest rates increased and current coupon agency MBS spreads widened. The portfolio remains deeply out of the money, supporting stable cash flow and preserving its strong credit profile. Credit performance remains exceptional, with delinquency rates holding steady and prepayment activity declining modestly relative to prior periods.

Grander’s Outlook:

Looking ahead, we expect U.S. growth to remain resilient but uneven, with GDP tracking near 2.1% –2.5%. AI related capital spending and corporate earnings should continue to support equities, while persistent inflation, geopolitical risks, elevated bond yields, and high valuations warrant disciplined security selection and balanced risk exposure.

  • Growth: Economic data continues to exceed consensus expectations, supporting GDP growth of approximately 2.1% – 2.5%.
  • Energy and inflation: Geopolitical tensions, including conflict involving Iran, are likely to keep energy prices volatile, sustaining pressure on headline CPI and core PCE and limiting the scope for near-term rate cuts.
  • Labor market: Stable employment growth and unemployment of 4.0% – 4.2% suggest no immediate recession signal, though labor conditions bear close monitoring.
  • Inflation: Headline CPI at 3.7%, driven partly by energy shocks and crude-oil volatility, reinforces a more hawkish policy outlook.
  • Federal Reserve: Following September’s 25-basis-point rate increase to a 3.75% – 4.00% target range, we expect the Fed to maintain a restrictive stance at its late-October meeting as it seeks to contain inflation.

The statements expressed herein are as of the date published, are subject to change at any time based on market or other conditions and are based on information from sources believed to be reliable. This publication is intended merely to highlight issues and is not intended to be comprehensive or to provide advice. Permission is given for personal use only. Any reproduction, modification, distribution, transmission or republication of the content, is prohibited.

2026 3rd Quarter Commentary