Fed Watch – 8/21/2026

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This week, the Treasury has entered the picture and the US debt level has reached a very special milestone. This is ITR Economics Fed watch, thank you for joining us for this August 21st edition. I’m Connor Lokar. And we had what I would call an interesting week, and a special week, as the Treasury has waded into the conversation with a little bit of market intervention on long bond yields.

But before we get there, I want to talk about what maybe led to that earlier this week, and some earlier in the week housing data that I think makes an interesting backdrop for what we have seen here in the last few days. So, this was a big week on the data calendar, particularly for housing, as we got both housing starts, housing permits, and also look at the HMI. So the HMI for those not familiar, is the US Housing Market Index from the National Association of Home Builders. So we got that on Monday, the August reading, and it’s a favorite of ours on the housing side, we do like to leverage that as a leading indicator on a rate of change basis. And that came out on Monday and it looked reasonably good. It was hardly exciting, but it wasn’t totally disastrous either, against the July reading, improving slightly from July month to month and also compared to year ago levels.

Unfortunately, that optimism was short lived as the Census Bureau dropped housing data on Tuesday, and it was quite unfortunate, I’ll call it. Starts for July came in dreadful on the single family side, coming in 16.6% below the July 2025 level, so month over month there dropping sharply. But it also really sharply dropped from the June level, so month to month. So sequentially from June ’26 to July ’26, we saw that that was a 15.6% drop from the prior month’s level. And that is the worst ever month to month drop for June to July in a data set that goes all the way back to 1959. So a little bit of precedent there showing that builders are still keen on trying to anyway control available supply in what’s currently and still a very strained home buying environment that is clearly not loving the renewed upward pressure we’ve seen on mortgage rates and long bond yields in the last couple of quarters. And remember, I called this in a recent Fed Watch. I can’t remember if it was last week or the week before, but I did say something along the lines of, you know, thoughts and prayers for the housing market because I suspected the housing market would not love what we’ve seen. And it appears that it didn’t.

So, you know, as we think about that, as of today, 10-year yields are up more than 70 basis points from their late February lows preceding the Iran conflict. And of course, we’re going to see a directional relationship there with fixed rate mortgages tracking that 10-year plus a spread. So effectively, again, nearly a 70 basis point increase on mortgages as well that are now closer to 7% than 6. So this brings me back to the Treasury and the Fed and the news of the week. So, for those that did not read, we did see that the treasuries announced a decision to starting in early September here and running through early November, they’re going to be buying back $4 billion or more of their own long duration, 10 to 30 year bonds, on several occasions here coming up, and that is doubling the previous $2 billion cap. Which I think is curious, given both some of the, not just the early housing data that I just reviewed for you, but also, again, some of the Kevin Warsh commentary from the Fed as it relates to long bond yields in recent weeks.

So again, basically in plain English, you know, the Treasury is arguing that, you know, we’re not creating new money here, right? We’re only using money from selling short term treasuries to buy long bonds. And so remember, it’s, you know, it’s not QE, right? It’s not yield curve control, because QE is technically when the Fed is, you know, conjuring reserves out of thin air to buy bonds. And this is just the treasury buying its own bonds with proceeds from selling its own bonds that are shorter dated. So I guess we’ll call it a liquidity operation, how about liquidity massage? I think I like that better, liquidity massage, trying to squish down those aches and pains from the long bond, I think I like that. So essentially, I think what effectively this is, is the Treasury pushing back and trying to send a market signal.

Because in the grand scheme of things, going from a $2 billion cap to a $4 billion cap, you know, in a sane world doubling in multiple billions of dollars would be a lot of money. But of course, this is the United States we’re talking about here. So in the grand scheme of things, it is kind of a nominal move. And again, I think it’s more of a signal to the market. And again, it’s a little bit counter, I think, to the commentary we’ve had here on Fed Watch for the last few weeks, where Kevin Warsh on the Fed’s side of the fence has indicated that the Fed might be okay with some higher long bond yields and view that as sufficient tightening and maybe as a reason why we don’t need to see higher short term rates via Fed hikes on the federal funds rate, which you know, that development, obviously housing hasn’t loved. So is the Treasury trying to kneecap that? You know, so far it hasn’t worked, honestly here so far this week. We see yields initially dropped on the news, and from the press conference and announcements from Scott Bessent. But yields are back up to their earlier in the week highs. Gold is up. Bitcoin’s up. So I’m not really sure that it’s working, but I’m just wondering, is this an early sign of friction maybe? Or maybe some oppositional goals, we’ll call it between the Fed and the Treasury. Probably a little bit too early to tell at this point, but I certainly found it interesting nonetheless.

So for closing news, I’d be remiss not to mention that, we crossed the $40 trillion debt threshold here, in the United States. So congrats, everybody, we did it. I think we all have a free set of steak knives coming in the mail. At least we should, I mean, we deserve that much. So we’ll see you next week on Fed Watch.