Mim q2 2026 short duration commentary

Short Duration Commentary Q2 2026

Commercial mortgage-backed securities 15

Residential mortgage-backed securities 18

Overview During the second quarter we saw some of the recent familiar macro themes evident over the past several months continue to play out as markets looked past the fragile Middle East ceasefire with energy prices falling as traffic through the Strait of Hormuz chokepoint gradually improved, inflation readings generally came in slightly below expectations and central banks seemed more inclined to hold off on rate hikes for the time being.

Against that backdrop, economic growth indicators were mostly steady, although growth in the U.S. looks increasingly skewed with a discernible K-shaped environment prevailing on the consumer spending front while business capital investment is powering ahead, led by AI-driven outlays and the data center buildout, picking up the slack for other areas of the economy that have lagged.

Newly seated Federal Reserve Chair Kevin Warsh presided over his first FOMC meeting in June and began his reshaping of the institution. Significant departures from his predecessor included his declining to provide estimates of the future trajectory of the federal-funds rate as part of the “dot plot” forecast, which was not a great surprise, as well as his forcefully noted determination to return inflation back toward the Fed’s 2% target, which did catch the market a bit wrong-footed and led to a selloff in Treasuries. The move higher in rates was likely supported by a more hawkish dot plot, with 9 of 18 FOMC participants projecting at least one rate hike by year-end versus none at the March meeting. However, the distribution also showed greater dispersion further out, as the number of participants projecting at least one rate cut rose from one in 2026 to seven in 2027, leaving the median expected federal funds rate unchanged at 3.625%.

Geopolitical environment Geopolitical developments remained an important component in evaluating the overall investment landscape throughout the quarter, although their market impact has evolved as energy prices have moved lower. Concerns over a sustained energy shock that arose in March have begun to ease, and markets have become increasingly focused on whether lower oil prices will translate into more durable improvement in inflation dynamics. This shift helped support risk sentiment at the end of the quarter, particularly in cyclical sectors that underperformed during periods of heightened energy volatility earlier in the first half.

At the same time, heightened geopolitical uncertainty remained present, and markets continued to balance the potential benefits of de-escalation against the implications for inflation, rates, and demand across spread sectors. Lower energy prices were supportive for growth and helped improve the inflation outlook but also raised questions about the durability of yield-driven demand for spread product securities. While recent ceasefire and diplomatic developments helped alleviate immediate concerns around more prolonged or lasting energy supply disruptions, uncertainty remains regarding the durability of a long-term resolution and the potential for renewed volatility should tensions re-emerge. As a result, geopolitical developments continued to influence markets, but increasingly through inflation and rates rather than as a direct driver of risk-off behavior.

SHORT DURATION COMMENTARY Q2 2026 2