MBS Weekly Market Commentary Week Ending 08/28/2020

The US yield curve saw a sharp steepening after the Federal Reserve’s dovish statements from Jackson Hole. The plan, as described by Jerome Powell, Chairman of Federal Reserve, shifts the Fed’s focus away from a 2% inflationary target to concentrate on employment shortfalls in the US Labor Market. Implicitly, this move will allow the Fed to take any QE action necessary to support employment and potentially overshoot 2% inflation for periods of time. In short, close attention will be paid to labor statistics and upcoming reports such as the ADP National Employment Report, scheduled to release Wednesday, 9/2. Critics deem the Fed’s shift in policy incredibly dovish and believe the backstopping of companies through buying corporate bonds and other means only delays the inevitable. However, many investors have learned not to fight the Fed and stocks rose sharply as a result.
The US 30-year is currently yielding 1.52%, while the US 10-year’s yield is .74% – both reaching their highest yield since 6/17/20. The 10-year TIPS yield decreased to -1.03%, signaling that while long and intermediate-maturity yields increased in the bond market sell-off on Thursday, inflation continues to hamper real yields on most bonds.

Relative to Treasuries, duration-adjusted performance of mortgage-backed securities improved for 30 and 15-year Fannies last week. Fannie 30-year coupons outperformed the 10-year Treasury by 3-7 ticks on a cumulative 5-day basis. Fannie 15-year coupons improved by 5-9 ticks in their 5-day cumulative totals. Ginnies had a mixed 5-day cumulative performance as the 2s lagged 5 ticks, while performance of the rest of the Ginnie coupons tracked the benchmark or edged slightly above it.

The graph below demonstrates the relationship between September Ginnie 2s and US 10-year. Liquidity in the Ginnie 2s continues to improve as 2s made up 18% of all Ginnie TBA trades on Friday.

For those unfamiliar with using duration-adjusted performance of MBS, duration-adjusted performance is used to calculate the move in MBS prices compared to an expected price change based on the security’s duration – relative to the benchmark duration. The calculation serves to provide a measurable comparison between the performance of an investment in MBS or Treasuries. If the performance of an MBS is said to “outperform” the Treasury benchmark when bonds have rallied, the price of the MBS rallied more than what was expected based on the hedge-ratio calculation of the previous day’s close and vice-versa.

According to MBA’s Weekly Mortgage Applications Survey for the week ending on 8/21, total applications fell by 7.2%. Refinance applications were hit the hardest with a 10.2% drop, while purchases fell only by 1.8%. This drop in refis was almost a certainty due to the 50bp refinance tax levied, then delayed to December 1st, by the FHFA. The FHFA’s second announcement this week extended the timeframe for Fannie and Freddie to buy loans in forbearance. They will now continue to buy loans in forbearance up until a September 30th deadline. The FHFA’s announcements were appreciated by the Mortgage Bankers Association, and they serve to delay an inevitable credit tightening during the current pandemic.

10-Year Treasury Yield Curve

Compare this chart with the mortgage rates chart to see how the 10-year treasury and mortgage rates are correlated. Read more below to learn how mortgage rates are tied to the 10 year treasury yield. View raw data on U.S. Department of the Treasury website.


Mortgage Rates Today

The current MBS daily rates are shown below in this chart for 5/1 Yr ARM, Jumbo 30 Yr, FHA 30 Yr, 15 Yr Fixed, 30 Yr Fixed. Sign up for our MBS Market Commentary to receive daily mortgage news in your inbox.

About the Author

Robbie Chrisman, Head of Content, MCT

Robbie started his mortgage industry career with internships during high school and college at Peoples National Bank in Colorado, and RPM & Bay Equity in the San Francisco Bay Area. After graduating from The University of Texas at Austin with a degree in Finance in 2014, he went to work at SoFi, where he rose to Director, Capital Markets assisting in the creation of SoFi’s residential mortgage division before leaving to work for TMS in Austin, Texas. From there, he went to work for FinTech startup Riivos in San Francisco and now is the Head of Content at Mortgage Capital Trading (MCT) in San Diego.

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Previous Weekly Market Reviews by Mortgage Capital Trading (MCT)

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MBS Weekly Market Commentary Week Ending 3/31/23

The market reaction went a little “too far, too fast” in regard to the Fed policy pivot. We witnessed the coupon stack (i.e., the price spread between TBA coupons) decompress in more than a trivial manner in a short period. However, the primary mortgage market has been largely reluctant to follow the Treasury rally, and mortgage rates have ultimately not dropped by the same amount as Treasury yields.

MBS Weekly Market Commentary Week Ending 3/24/23

The FOMC raised its benchmark rate by 25 basis points to a new range of 4.75%-5.00% on Wednesday, a middle ground policy move made in the hope of tampering inflation without further harming the banking system. The raise marks the 9th consecutive rate hike since the Fed began hiking in May of last year and brings the target fed funds rate range to the highest level since September 2007. While the central bank’s monetary policy has been aimed at correcting inflation, it has also revealed hidden weaknesses (e.g., entities whose balance sheets relied on low interest rates).

MBS Weekly Market Commentary Week Ending 3/17/23

Next week will reveal the Fed’s resolve on continuing to beat the drum on their aggressive inflation fight. The word until now has been that the central bank will keep hiking interest rates until inflation is under control.

MBS Weekly Market Commentary Week Ending 3/10/23

Events this week likely will lead to a higher peak interest rate than investors had been expecting just weeks ago. Central bankers appear worried about a cycle in which workers seek higher pay to offset inflation’s bite, and in turn trigger more price increases. In fact, inflation remains high because people have jobs and earn enough income to cover stubbornly expensive housing costs. Robust hiring is good for the economy and workers, but elevated pay growth puts added pressure on the Fed to bring down earnings. 

MBS Weekly Market Commentary Week Ending 2/10/23

The week after the jobs report is generally pretty data-light, and this week was no exception. With a dearth of data, market movement hinged on “Fed speak” and consumer sentiment. We saw some volatility return to bond markets as investors built in expectations for a more hawkish Fed. As a reminder, the Fed raised its benchmark rate last week to a range of 4.5% to 4.75%. Let’s run through what we’ve learned in the wake of that decision and a robust U.S. payrolls report that took some wind out of investors’ sails that had hopes for rate cuts by summer.

MBS Weekly Market Commentary Week Ending 2/3/23

As strong as economists may have thought the job market was, it’s even stronger. In addition to headline non-farm payrolls in January (517,000) beating estimates by around 300,000, employment numbers were revised higher for the past two months. Yes, a tight labor market is anathema to any sort of quick stop to the Federal Reserve’s rate hiking cycle, but the growth rate in average hourly earnings is declining, which will be welcome news to Fed Chair Powell and his colleagues. There exists a raging debate among economists over whether we’ll need a sharp rise in unemployment to keep inflation low.