MBS Weekly Market Commentary Week Ending 1/13/23

Money Market and Fed Disconnect

Pay attention to the bond market rather than the Fed. That’s what I’m hearing as we learned this week that inflation continued to ease in December, though much focus was also on Wells’ exit from the correspondent space and its ramifications. The headline CPI (-0.1% month-over-month, +6.5% year-over-year) posted the slowest inflation rate in more than a year and core inflation (+5.7% year-over-year), which excludes food and energy, also posted the smallest advance in a year.

While inflation has clearly slowed from its pace in the middle of 2022, it is doubtful that the FOMC is ready to declare “mission accomplished.” Fortunately, the latest CPI report does send a clear signal that the Federal Reserve’s tightening campaign is working, and set off a sharp rally in both bonds and equities. That rally comes on the heels of last week’s utopian payrolls report, where the U.S. economy added more jobs than expected while wage increases, a driver of inflation, eased.

Hawkish or Dovish Fed?

Both the payrolls data and the inflation data have led to a renewed sense that the Fed may not have to raise the fed funds rate range by as much as previously feared. Optimistically, this puts the Fed on track to downshift to smaller interest-rate increases and raises hopes for the economy avoiding a recession. Keep in mind that while the Fed has not notably misstepped yet in the tightening cycle, this tightening cycle was preempted by the mistake that was the Fed’s fourth round of quantitative easing. And before we are able to declare mission accomplished, the Fed has repeatedly warned investors that it is by no means finished tightening and the central bank will need to continue raising interest rates to combat inflation.

Both the payrolls data and the inflation data have led to a renewed sense that the Fed may not have to raise the fed funds rate range by as much as previously feared.

Several Fed speakers remarked on the subject with San Francisco Fed President Daly saying she expects the central bank to raise rates to somewhere over 5% while Atlanta Fed President Bostic said that the Fed is willing to overshoot when it comes to tightening and “there is still much work to do.” St. Louis Fed President Bullard noted that interest rates are moving closer to a “sufficiently restrictive” level, although they are not there yet. Kansas City Fed President George said that she believes the federal funds rate will be above 5% into 2024. Minneapolis Fed President Kashkari pointed out that rising prices should force both supply and demand to adjust (up and down, respectively), but supply hasn’t increased.


Reasons for Optimism

While Fed members continue to pound the hawkish message that rates are heading above 5% and will stay there all year, traders have speculated that the slowdown in wage growth will keep the Fed from having to enact further hawkish rate hikes. Money markets are pricing a peak fed funds rate around 4.9%, followed by nearly half a percentage point of rate cuts by the end of this year.

Obviously, inflation data is heavily influencing the plans for lenders and originators in 2023. It is hoped that the reduction in inflation we have seen over the past couple of months will nudge the Fed to turn “dovish.” Once the Fed wraps up its tightening cycle, MBS spreads will revert to the mean, downward pressure will be put on rates, and originators will see mortgage demand to start to rise again.

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.