MBS Weekly Market Commentary Week Ending 1/20/23

Inflation Nearly in the Rearview

Have you heard? Inflation was so 2022. All jokes aside, after we learned last week that U.S. inflation cooled for the sixth consecutive month (the consumer price index dropped 0.1% in December compared to the month prior), expectations are now that the Federal Reserve is likely to downshift rate hikes to 25 BPS going forward, beginning at next month’s FOMC meeting.

That narrative was corroborated this week when we learned that inflation at the wholesale level fell 0.5% month-over-month according to the Producer Price Index, driven primarily by a decrease in energy prices. Overall, it does look like inflation is on the way down via the benefit of the Chinese economy slowing down and oil prices dropping a bit, but as far as the Fed is concerned, it wants to see the labor market come more in balance.

A Shifting Fed Narrative

The Fed has prioritized transparency to reduce market volatility and voting FOMC members have been openly insisting that the central bank will not cut this year and that its terminal rate will be above 5%. Investors simply don’t believe it. That disconnect between the Fed and investors over what future policy will look like has been driving markets. Keep in mind that as long as the labor market remains tight (Initial Jobless Claims fell to 190,000 last week, the lowest level since the late 1960s when we had a military draft), the Fed has additional runway to remain hawkish.

For those hoping to see rates continue to fall, having already fallen more than 1% compared to October of last year, recent dovishness from the Fed has been welcomed. Earlier this week, Fed Vice Chair (FOMC voter) Brainard said that policy is now in restrictive territory and Philadelphia Fed President (FOMC voter) Harker said that he doesn’t see a current need for “overly restrictive” policy from the Fed. Boston Fed President (FOMC Voter) Logan suggested he thinks it is now prudent to moderate the pace of increases 

Home affordability dropped to its lowest level since 1986 this past October, spurred by high home prices and mortgage rates. 

The more mortgage rates drop, the more that helps home affordability. Homebuilders cutting prices, as we have seen of late, is also good news for affordability. But with buyer demand still out there, more housing supply hitting the market is the obvious solution. Unfortunately, housing starts fell in December for the fourth consecutive month and are down 3% year-over-year. Notable to mortgage investors, single-family home starts are down 10.6% compared to 2021. Materials and supplies for residential home construction are 38% higher since QE4 began in March of 2020.


The Dark Side of Lower Rates

We’ll all obviously be thrilled when rates drop and create both purchase loan demand and meaningful universe of refinance candidates one of these days, but are you prepared for the dark side of falling rates? I’m talking about margin calls and early payoffs.  Often, secondary marketing gains happen after your short hedge positions go bad, so start planning ahead now. We recommend a frequent liquidity check and constant updates to your assumptions and models.

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.