MBS Weekly Market Commentary Week Ending 1/6/23

Back to Business in 2023

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 in 2022. When the dust settled, 10-year Treasuries were 200+ BPS higher than the start of the year, the yield curve inverted in a bearish fashion (faster and farther than ever), 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. U.S. mortgage applications at the end of 2022 dropped to the lowest level since 1996 amid seasonal headwinds and high financing costs.

Overall agency mortgage bond gross issuance for 2022 came in at $1.7 trillion, far above the $1.3 trillion annual average seen during the 2000 through 2019 period, but far below the $3.3 trillion average seen in 2020 and 2021. The MBA’s forecast for 2023 expects originations to fall to $1.9 trillion and the first quarter is projected to be the roughest quarter, with total originations expected to fall to $345 billion. Originations are expected to increase throughout the year, and similarities have been drawn with 2018 in terms of origination volume and margins. Mortgage rates are expected to fall throughout 2023, with the 30-year mortgage rate falling to 5.2% by the end of the year.

Housing and Labor Markets

Housing has traditionally led the economy out of a recession, and we have seen housing starts reach something like 2 million annual units in early stage recoveries. Housing starts are expected to remain depressed, around a 1.5 million annual rate in 2023. The pre-bubble historical average since the late 1950s has been 1.4 million housing starts annually, but the U.S. population is now much larger than it was seven decades ago. The National Association of Realtors estimates a 5 million to 6 million unit deficit in needed housing, so the demand is there. Simply put, homebuilding can’t stay depressed forever, though you don’t build what people can’t afford to buy. Home price appreciation is predicted to slow and eventually turn negative by the end of 2023, although that means annualized single-digit appreciation rather than a crash. Finally, existing home sales are expected to remain low, but improve throughout the year.

The bond markets drive interest rates, and much of the current sentiment in the bond markets is being dictated by the strong domestic labor market, which gives the Fed fuel to further tighten policy. Earlier this week, the ADP figure came in at 235k versus the expected 150k and we also had lower initial jobless claims. Today, payrolls beat estimates, coming in at 223k versus 203k expectations and unemployment declined to 3.5%. The market was almost hoping for a weak report that would have triggered a rally in stocks and bonds as it would have increased the chances that the Fed will pivot from a tight monetary policy to a neutral one.

There are three basic inputs to current inflation: supply chain issues (stemming from the pandemic, though they are largely fixed), housing (expected to fade by the summer), and services ex-housing (read: service sector wage growth).

There are three basic inputs to current inflation: supply chain issues (stemming from the pandemic, though they are largely fixed), housing (expected to fade by the summer), and services ex-housing (read: service sector wage growth). Services excluding housing are the focus of the Fed as the central bank is trying to avoid a wage-price spiral, last seen in the 1970s. A big component of this will be productivity growth, which has been muted. As long as wage growth remains high, the Fed will keep tightening. Fed Chair Powell has insisted that the job openings and quits rate should decrease and wage growth should slow to help bring down prices.


Hawkish FOMC Minutes and Best Business Practices

FOMC minutes released earlier this week indicated that Fed officials are expecting rates to remain elevated in 2023. Though the inflation data for October and November showed welcome reductions in the monthly pace of price increases, consistent with easing supply bottlenecks, the FOMC stressed that it would take substantially more evidence of progress to be confident that inflation was on a sustained downward path. The current restrictive policy approach appears to be best until the FOMC is satisfied with easing inflationary pressures. The FOMC also noted that the Fed Funds futures were at odds with the FOMC, and that no members thought it would make sense for the Fed to start easing in 2023. My two cents is that it’s hard to see the FOMC opening up the sluice gates again anytime soon.

Your hedging model probably dictates what percentage of your pipeline to hedge based on your pull-through at five or six stages of loan manufacturing. Test pull-through at least quarterly and monitor it closely when there’s a lot of volatility. Adding things like new products or branches can change your pull-through numbers. We are not out of the woods yet, and you should be prepared for any further downturn with a written plan that has specific actions to be taken at set milestones for volume declines. Making decisions in the heat of the moment is not as efficient as having a plan that’s thought out well in advance and can be referenced more dispassionately as each milestone is reached.

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.