MBS Weekly Market Commentary Week Ending 1/27/23

A Path to a Soft Landing

Even with the most aggressive pace of rate hikes in over a generation, 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.

The PCE price index, the Fed’s preferred measure of inflation, rose 3.2% compared to 4.8% in the prior quarter. A separate report on labor markets published yesterday (weekly jobless claims unexpectedly fell) also points to a resilient economy, rather than one on the verge of a slump. However, the downside of a tight labor market is that it will keep the Fed concerned about wage pressures remaining persistently high. And the Fed already has in the back of its mind that it needs to avoid the same mistakes seen in the 1970s when rates were constantly cut at the first sign of disinflation only to see inflation shoot higher again.

A Game of Chicken

The fed funds futures are a lock for a 25 BPS rate hike next week, which would put the target rate at 4.5% to 4.75%. Now that the pace of rate hikes have slowed, yield curve dynamics are becoming more important. Bets still favor a rate cut by November or December of this year even though the Fed hasn’t flinched on its anti-inflation rhetoric. There are many people out there that believe the bond markets have gotten ahead of the Fed’s messaging when it comes to the time value of money, and it’s turning into a game of “chicken” with the Fed. 

A soft landing refers to an economic scenario where tighter monetary policy cools spending and lowers inflation while avoiding a recession. 

Rising costs across the economy have been discouraging potential home buyers. That home sales are likely to slow this year is apparent due to high mortgage rates (the 30-year lending rate is at roughly 6.15%) and a median new home sale price at a near-record $471,200. Fortunately, most potential buyers are adjusting their plans accordingly by increasing their savings and either spending more than they had hoped or delaying purchases. The 3% mortgage rates of the pandemic are probably not coming back, at least in the near term.


Housing Supply and Demand

New home sales rose 2.3% month-over-month to a seasonally-adjusted annual pace of 616,000 in December, the highest pace since August. This is down 26.6% on a year-over-year basis, showing that higher prices have a built-in governor: prices will increase until they decrease demand, eventually falling back to a new equilibrium. As home price appreciation stagnates, that will help to ease inflation.

An estimated 644,000 homes were sold in 2022, which was a 16.4% decline from 2021. For all the talk of “supply destruction” in the housing market due to people not wanting to give up their low rates, the drop in sales has helped send the monthly supply of new homes available for sale (461,000 at the end of December) to nearly nine months, well above the six-month average seen since February 2020. Six months of supply is considered a balanced market, which should help alleviate the problem of affordability as it will help pressure prices lower. Additionally, the pullback in mortgage rates has spurred some renewed demand among home buyers.

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.