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 1/27/23

Even with the most aggressive pace of rate hikes in over a generation during the past year, recent data suggests that there’s still a path to a “soft landing” for the Federal Reserve. The U.S. economy posted the kind of mild slowdown in the last quarter of 2022 that the Fed wants to see as it attempts to tame inflation without choking off growth. Gross domestic product beat expectations to rise at a 2.9% annualized pace, down from 3.2% in the third quarter and a long way from a recession.

MBS Weekly Market Commentary Week Ending 1/13/23

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.

MBS Weekly Market Commentary Week Ending 1/6/23

While it’s back to business as usual, it was a fairly quiet week as we settled into the new year. Fast inflation and high interest rates dominated the narrative and upended markets across the world last year. When the dust settled, 10-year Treasuries were 200+ BPS higher than the start of the year, the curve inverted in a bearish fashion faster and farther than ever, implied volume spiked, and mortgage spreads were pushed from stubbornly rich to suddenly cheap. The result was an entire trade-able universe moving out of the money, originations grinding to a halt, and duration becoming a function of illiquid trade flows.

MBS Weekly Market Commentary Week Ending 12/23/22

MCT would like to wish everyone a Merry Christmas and Happy Holidays. Talk to close the year has been dominated by the Federal Reserve’s most aggressive policy tightening in four decades and its impact on the economy, and for us the residential housing market.

MBS Weekly Market Commentary Week Ending 12/16/22

Consumer-price increases have begun a more pronounced slowdown from their 40-year high earlier this year as the Fed slowly gains ground against inflation. U.S. short-term inflation expectations, which the Fed does take into its calculus, eased again to the lowest level in more than a year, helped by falling gasoline prices. CPI came in at 7.1% on Tuesday, below expectations, however the Fed became more hawkish, which is a signal that it is too early to take a victory lap.