August ended with a meaningful shift in the rate outlook. A weak jobs report pushed rates lower early in the month, but stable inflation data and Kevin Warsh’s hawkish Jackson Hole comments drove September rate-hike expectations sharply higher. Markets now price roughly a 60–65% probability of a September hike, while the 2-year swap and longer-term rates are at 52-week highs.
For borrowers, the message is clear: hedging costs continue to rise, while higher Treasury yields are improving defeasance economics. Defeasance activity remained steady in August, with a modest increase in both closings and the origination pipeline, although valuation remains a challenge for both sales and refinancings.
What Happened
- Hawkish shift. Warsh indicated the Fed needs to raise rates if inflation remains elevated. September hike expectations quickly moved from roughly 30–36% to 60–65%.
- Rates moved higher. Short-term yields increased roughly 10–12bps following the Jackson Hole comments, with the 2-year swap reaching a 52-week high. Treasury yields finished August approximately 12–16bps higher across the curve.
- Inflation remains elevated. Headline PCE held at 3.7%, well above the Fed’s 2% target.
U.S. Treasury yield curve, 8/31/26 (green) vs. 8/3/26 (red).
What Markets Are Pricing
The market now assigns roughly a 60–65% probability of a September rate hike, versus approximately 30–36% earlier in the month. The next major test is August CPI on September 11, followed by the September 15–16 FOMC meeting. A hot CPI print could further cement expectations for a hike.
Fed Funds Futures (Bloomberg, priced 8/31/26).
Our Recommended Strategy
- Don’t wait on hedging. Swap and cap costs continue to increase, and borrowers that delayed execution saw materially higher costs last week.
- Execute when you can. The hedging pipeline is building as borrowers wait for better levels or closing certainty. We expect more activity to come off the sidelines in September.
- Revisit defeasance economics. Higher Treasury yields are making defeasance costs more attractive, creating an opportunity for borrowers evaluating a sale or refinance.
What We’re Seeing on the Ground
Defeasance activity remained steady in August, with a modest increase in both closings and the origination pipeline. Higher yields have improved defeasance economics, but valuation remains the primary challenge for sales and refinancings. Assumptions and extensions remain active, often requiring additional equity to close.
What We’re Watching
Jake Tillman, Director
Jake Tillman is a Director, Defeasance & Hedging at Defease With Ease | Thirty Capital, bringing 5+ years of experience specializing in debt structuring and risk analysis for CRE transactions. He supports the execution of financing strategies, including CMBS, as well as interest rate hedging and capital markets transactions. With expertise in market analytics, he provides data-driven insights to optimize capital structures and manage interest rate exposure. Jake assists in scenario analysis, transaction execution, and risk assessments, ensuring alignment with market conditions and client objectives. His technical background includes Bloomberg analytics and structured finance evaluation.
