The Big Idea

Hands on the wheel

| April 24, 2026

This material is a Marketing Communication and does not constitute Independent Investment Research.

Markets have embraced the prospects of uneasy stability for now where portfolio returns will rise or fall based mainly on carry. Take the steady bid for risk assets as one piece of evidence. That conviction relies on a decelerating standoff in US-Iran, of course, and steady Fed policy despite pending change in leadership. It wouldn’t be investing without risks to the upside and downside, of course. But those risks diminish over longer horizons.

Hands on the wheel

Five main factors are pulling on the wheel of the markets these days, not all equally. In order of influence:

  • US-Iran and oil. This clearly can push US rates either higher or lower depending on whether the conflict re-escalates or de-escalates. Even a prolonged standoff matters if it impairs energy production enough to make it harder to restart. The market for now—oil futures being the best example—is pricing steady de-escalation. This becomes the anchor for a base case.
  • Federal Reserve leadership and transition. Powell finishes his term as chair next month with Warsh waiting in the wings, especially after the Department of Justice dropped its criminal prosecution of Powell. Warsh will be only one vote out of 12 on the FOMC, but he wants to run a more narrow Fed that relies on rates to implement policy more than on balance sheet. The immediate implications of a leadership change are small, but Warsh over time has potential to make bigger changes that could push up longer rates and widen MBS spreads.
  • US economic strength and inflation. Rising disposable income, increasing capital investment, a healthy labor market and lagged effects of tariffs all have helped economic growth but also have kept feeding concerns about persistent inflation. And as inflation goes, so goes Fed policy. This is a rates and credit issue.
  • Tech debt supply and private credit. The high yield market has seen more than $11 billion in new debt in the last week alone to fund data center construction, and projected capital investment this year from Google, Amazon, Meta, Microsoft and Oracle tallies $656 billion, which almost certainly will require tapping debt markets. This supply overhang joins concerns about business development companies and private credit funds to keep credit spreads soft relative to MBS and consumer credit.
  • Low MBS supply and sufficient demand. Total agency MBS net supply this year through March is only $15 billion, meaning that almost any demand should keep spreads contained. Having the Fannie Mae and Freddie Mac portfolios in the market is probably enough, with some help from broader growth in bank balance sheets.

These are not independent and suggest a few scenarios over the next month or so.

Uneasy stability (60%)

Rates and spreads hold in a narrow range around current levels in this base case. Carry feeds returns. Risk assets outperform rates by generating more income, with MBS holding better than credit.

This scenario relies on a continuing standoff in US-Iran but with signs of both parties eventually looking to de-escalate. It gets a lift if Warsh heads toward confirmation without signs of immediate policy changes. More signs of good economic growth and persistent but not accelerating inflation also feed expectations of the Fed on hold this year. Carry in risk assets give MBS and credit a lead in returns over rates, although MBS leads with credit still absorbing a surge in debt needed to finance AI infrastructure and an overhang of worry about the state of private credit.

A bullish breakthrough (25%)

Rates drop in this scenario, with the US 10-year dipping below 4.15%, and the yield curve steepening. Risk assets tighten and outperform rates with credit leading MBS on expectations of a faster decline in energy prices.

This relies on a breakthrough in US-Iran negotiations where both sides can claim victory and work towards re-opening the Strait of Hormuz possibly with an international monitoring agreement. Warsh confirmation could push this scenario along, too, adding a vote to the FOMC willing to anticipate material productivity gains from AI—even if inflation stays elevated for now.  Both breaks would bring investors into the market that might have hesitated without clear direction on either US-Iran or Fed leadership.

Bearish turn toward stagflation (15%)

Rates rise here, with the US 10-year above 4.40%, and the yield curve flattening. Risk assets widen and underperform rates with credit widening faster than MBS.

This scenario turns on re-escalation in US-Iran with the Strait of Hormuz closed, more damage to regional infrastructure for pumping and refining oil, gas and helium and new highs in oil prices. Yields on the front of the curve rise with expected inflation and a Fed on hold. But rates in the back end rise more slowly or even dip on concerns about future growth. Prospects of slower growth hit credit harder than MBS.

Positioning

Risk assets do well across most of the probability space, and keeping duration on the front of the curve does well, too.  Credit is more conditional, beating MBS only in a bullish breakthrough. But most of the credit risk is corporate, not consumer. So, adding prime consumer exposure in place of corporate could mitigate the corporate credit exposure while preserving carry and return.

Changes over longer horizons

Over three to six months, the impasse in the US-Iran conflict is likely to be resolved for better or worse, and the transition to a Warsh Fed should be underway with possibly a June and July FOMC meeting under his leadership. If US-Iran is short of a hot military conflict, then uncertainty should decline and the appetite for risk assets should improve. The risks of a bullish breakthrough or a bearish turn toward stagflation should diminish. That should make carry progressively more valuable.

* * *

The view in rates

Oil. Tariffs. Rising capital expenditure. Rising disposable income. Add to all of these the strong March payrolls and a decline in the unemployment rate, suggesting a steady if not strong labor market. The Fed has little if any room to move rates lower this year. The front end of the curve is probably stuck at a floor of 3.65% or higher depending on US-Iran.  Fair value for the 10-year note looks like it is 4.25%, although it is likely to spend more time above that mark than below it for the balance of the year.

Key market levels:

  • Setting on 3-month term SOFR traded Friday at 367 bp, unchanged in the last seven weeks
  • Further out the curve, the 2-year note traded Friday at 3.77, up by 6 bp over a week. The 10-year note traded at 4.30%, up by 5 bp.
  • The Treasury yield curve traded Friday with 2s10s at 53 bp, flatter by 1 bp over the last week, with 5s30s at 100 bp, flatter by 4 bp
  • Breakeven 10-year inflation traded Friday at 243 bp, up by 7 bp over the last week, with 5-year forward 5-year breakeven at 225 bp, up by 5 bp over the last week but still signaling confidence that the Fed target still holds. The 10-year real rate finished the week at 187 bp, down 2 bp on the week.

The view in spreads

The market clearly anticipates de-escalation in US-Iran and slowly tighter spreads along the way. That is how spreads have played out.

Technicals are constructive for MBS although a little less so for corporate debt. MBS net supply continues to run very low with Fannie Mae and Freddie Mac continuing to add to their mortgage portfolios. Insurers continue to issue annuities and buy corporate and structured credit, but credit is facing significant needs to finance the current AI buildout. MBS spreads should be able to hold their ground in most circumstances, but credit spreads look soft.

The Bloomberg US investment grade corporate bond index OAS traded on Friday at 78 bp, tighter by 1 bp on the week. Nominal par 30-year MBS spreads to the blend of 5- and 10-year Treasury yields traded Friday at 109 bp, wider by 2 bp. Par 30-year MBS TOAS closed Friday at 16 bp, wider by 3 bp on the week.

The view in credit

Haves and have nots continue. Big companies have healthier balance sheets than smaller companies. Consumers at the middle-to-higher end of the income distribution also have liquidity and wealth. Bank lending to non-bank financial institutions, including private debt funds and business development companies continues to expand. Bank regulators continue to focus on that category of lending, which could eventually tighten the private credit markets. But for now, credit metrics for NBFI lending are strong relative to traditional bank lending such as C&I.

Steven Abrahams
steven.abrahams@santander.us
1 (646) 776-7864

This material is intended only for institutional investors and does not carry all of the independence and disclosure standards of retail debt research reports. In the preparation of this material, the author may have consulted or otherwise discussed the matters referenced herein with one or more of SCM’s trading desks, any of which may have accumulated or otherwise taken a position, long or short, in any of the financial instruments discussed in or related to this material. Further, SCM may act as a market maker or principal dealer and may have proprietary interests that differ or conflict with the recipient hereof, in connection with any financial instrument discussed in or related to this material.

This message, including any attachments or links contained herein, is subject to important disclaimers, conditions, and disclosures regarding Electronic Communications, which you can find at https://portfolio-strategy.apsec.com/sancap-disclaimers-and-disclosures.

Important Disclaimers

Copyright © 2026 Santander US Capital Markets LLC and its affiliates (“SCM”). All rights reserved. SCM is a member of FINRA and SIPC. This material is intended for limited distribution to institutions only and is not publicly available. Any unauthorized use or disclosure is prohibited.

In making this material available, SCM (i) is not providing any advice to the recipient, including, without limitation, any advice as to investment, legal, accounting, tax and financial matters, (ii) is not acting as an advisor or fiduciary in respect of the recipient, (iii) is not making any predictions or projections and (iv) intends that any recipient to which SCM has provided this material is an “institutional investor” (as defined under applicable law and regulation, including FINRA Rule 4512 and that this material will not be disseminated, in whole or part, to any third party by the recipient.

The author of this material is an economist, desk strategist or trader. In the preparation of this material, the author may have consulted or otherwise discussed the matters referenced herein with one or more of SCM’s trading desks, any of which may have accumulated or otherwise taken a position, long or short, in any of the financial instruments discussed in or related to this material. Further, SCM or any of its affiliates may act as a market maker or principal dealer and may have proprietary interests that differ or conflict with the recipient hereof, in connection with any financial instrument discussed in or related to this material.

This material (i) has been prepared for information purposes only and does not constitute a solicitation or an offer to buy or sell any securities, related investments or other financial instruments, (ii) is neither research, a “research report” as commonly understood under the securities laws and regulations promulgated thereunder nor the product of a research department, (iii) or parts thereof may have been obtained from various sources, the reliability of which has not been verified and cannot be guaranteed by SCM, (iv) should not be reproduced or disclosed to any other person, without SCM’s prior consent and (v) is not intended for distribution in any jurisdiction in which its distribution would be prohibited.

In connection with this material, SCM (i) makes no representation or warranties as to the appropriateness or reliance for use in any transaction or as to the permissibility or legality of any financial instrument in any jurisdiction, (ii) believes the information in this material to be reliable, has not independently verified such information and makes no representation, express or implied, with regard to the accuracy or completeness of such information, (iii) accepts no responsibility or liability as to any reliance placed, or investment decision made, on the basis of such information by the recipient and (iv) does not undertake, and disclaims any duty to undertake, to update or to revise the information contained in this material.

Unless otherwise stated, the views, opinions, forecasts, valuations, or estimates contained in this material are those solely of the author, as of the date of publication of this material, and are subject to change without notice. The recipient of this material should make an independent evaluation of this information and make such other investigations as the recipient considers necessary (including obtaining independent financial advice), before transacting in any financial market or instrument discussed in or related to this material.

Important disclaimers for clients in the EU and UK

This publication has been prepared by Trading Desk Strategists within the Sales and Trading functions of Santander US Capital Markets LLC (“SanCap”), the US registered broker-dealer of Santander Corporate & Investment Banking. This communication is distributed in the EEA by Banco Santander S.A., a credit institution registered in Spain and authorised and regulated by the Bank of Spain and the CNMV. Any EEA recipient of this communication that would like to affect any transaction in any security or issuer discussed herein should do so with Banco Santander S.A. or any of its affiliates (together “Santander”). This communication has been distributed in the UK by Banco Santander, S.A.’s London branch, authorised by the Bank of Spain and subject to regulatory oversight on certain matters by the Financial Conduct Authority (FCA) and the Prudential Regulation Authority (PRA).

The publication is intended for exclusive use for Professional Clients and Eligible Counterparties as defined by MiFID II and is not intended for use by retail customers or for any persons or entities in any jurisdictions or country where such distribution or use would be contrary to local law or regulation.

This material is not a product of Santander´s Research Team and does not constitute independent investment research. This is a marketing communication and may contain ¨investment recommendations¨ as defined by the Market Abuse Regulation 596/2014 ("MAR"). This publication has not been prepared in accordance with legal requirements designed to promote the independence of research and is not subject to any prohibition on dealing ahead of the dissemination of investment research. The author, date and time of the production of this publication are as indicated herein.

This publication does not constitute investment advice and may not be relied upon to form an investment decision, nor should it be construed as any offer to sell or issue or invitation to purchase, acquire or subscribe for any instruments referred herein. The publication has been prepared in good faith and based on information Santander considers reliable as of the date of publication, but Santander does not guarantee or represent, express or implied, that such information is accurate or complete. All estimates, forecasts and opinions are current as at the date of this publication and are subject to change without notice. Unless otherwise indicated, Santander does not intend to update this publication. The views and commentary in this publication may not be objective or independent of the interests of the Trading and Sales functions of Santander, who may be active participants in the markets, investments or strategies referred to herein and/or may receive compensation from investment banking and non-investment banking services from entities mentioned herein. Santander may trade as principal, make a market or hold positions in instruments (or related derivatives) and/or hold financial interest in entities discussed herein. Santander may provide market commentary or trading strategies to other clients or engage in transactions which may differ from views expressed herein. Santander may have acted upon the contents of this publication prior to you having received it.

This publication is intended for the exclusive use of the recipient and must not be reproduced, redistributed or transmitted, in whole or in part, without Santander’s consent. The recipient agrees to keep confidential at all times information contained herein.

The Library

Search Articles