The Fed: Following a proactive end to 2025, the Federal Reserve opted to hold the federal funds rate steady at 3.50% – 3.75% during its January meeting. This "strategic pause" reflects a data-dependent Fed weighing solid growth against inflation that remains slightly sticky—hovering near 3% in December due largely to goods-sector tariffs.

While the consensus still points to a downward trajectory for rates throughout 2026, the path is becoming more gradual. The market is currently pricing in a "walk, don't run" easing cycle, with expectations for the 10-year Treasury to oscillate around 4%.  We could see the yield curve steepen further throughout this year, favoring shorter-term debt.  

The Warsh Factor: A major variable introduced this quarter is the nomination of Kevin Warsh for Federal Reserve Chair. Pensford noted three critical implications for the market:

          1.    A Hawk or a Dove?: Historically, Warsh has been an inflation hawk who opposed Quantitative Easing (QE). However, his recent alignment with administration goals suggests a pivot toward a pro-growth mandate in cutting rates further.
          2.    The "Shadow" Mandate: Markets are watching closely to see if his tenure will prioritize deregulation and limited intervention, potentially fueling capital formation.
          3.    Volatility: The uncertainty surrounding his policy stance may keep volatility elevated in the short term, with more clarity coming by late summer.

Agency Liquidity: One of the more bullish undercurrents in the debt market is the aggressive “stealth” stimulus from the Agencies. Fannie Mae and Freddie Mac have quietly added billions to their retained mortgage bond portfolios—increasing their combined positions by over 25% in late 2025 [reported by Bloomberg].  This serves a dual purpose: it increases profitability ahead of a potential recapitalization, and more importantly for Borrowers, it compresses spreads, with some quotes with ~1.0% spreads for Tier 3 and 4 affordable deals.

The Bridge Market: Beyond the Agencies, the private debt markets are evolving with compressed spreads. We are seeing a resurgence in the Collateralized Loan Obligation (CLO) market, where lenders are utilizing securitization structures to clear balance sheets and deploy higher volumes of fresh capital. Bridge debt has become an attractive option as Term SOFR continues to fall to “float” assets until the permanent financing market stabilizes given the lowering incremental cost of capital, and the ability to secure higher loan proceeds.

Outlook: While this is still mostly a "Lender’s Market," the leverage seems to be shifting. With liquidity returning to the secondary markets and the Agencies stepping up their floor-support, there are improved windows of opportunity to secure advantageous financing structures, and even positive leverage for the right deal.