MBS Weekly Market Commentary Week Ending 10/14/22

Lack of Clarity in High Coupon MBS Pricing

The lack of clarity in the high coupon MBS pricing makes it a difficult time out there for those trying to set rate sheets. A lot of loan scenarios are pricing below par as it has taken time for higher interest rates to be established in this market. The rapid rise in interest rates and transition to this high interest rate environment have been so swift that there aren’t any higher interest rates to offer. Mortgage prices are indeed a function of natural supply and demand, so one can’t order investors to pay a higher price.

The pace of the Fed’s rate hikes and winding down of QE4 have introduced heightened volatility to the bond market. The Fed has raised its benchmark interest rates five times this year, including three consecutive 75 BPS rate hikes, increasing the cost of borrowing money in the hope that more expensive loans will result in less investment, less business expansion, fewer jobs, lower pay, and ultimately less inflation.

Rates on the Rise

The futures market is now pricing in a terminal fed funds rate of just above 4.75% which would be 450 BPS of tightening over a year-long period, an aggressive cycle historically. For some historical context, in 1994, the Fed took up the target rate 275 BPS over the course of a year, which “blew up” the MBS market, taking out a bunch of mortgage arbitrage hedge funds in the process. From 2003 through 2006, the Fed took up the fed funds rate by 400 BPS and “blew up” the residential real estate bubble. This time around, the Fed will need to rely on continued strength in the labor market to soften the blow to the economy.

This week offered a fresh look at inflation and CPI which came in above expectations at a whopping 8.2% year-over-year in the headline figure. The average 30-year mortgage rate is nearly 7% as of this writing, about 100 BPS higher compared to the same time last month. The universe of American homeowners are almost guaranteed to remain without any incentive to refinance at least over the near term.

This week offered a fresh look at inflation and CPI which came in above expectations at a whopping 8.2% year-over-year in the headline figure. The average 30-year mortgage rate is nearly 7% as of this writing, about 100 BPS higher compared to the same time last month.

The Fed (hopefully) understands the overall higher mortgage rate environment that they have created in an attempt to raise prices and slow demand across the economic spectrum to bring inflation back down to its 2% goal. The Federal Reserve works under a Congressional mandate that requires it to pursue three policy outcomes: maximum employment, stable prices, and moderate long-term interest rates. While we often only hear of the dual mandate of 2% inflation and maximum employment, the current priority essentially boils down to just one policy outcome: stable prices.

The Fed has repeated that price stability is essential if we are going to have another sustained period of strong labor market conditions, but has exhibited little success in achieving it this year. After having consigned the word “transitory” to the realm of macroeconomic punch lines, the Fed has spent much of 2022 coming down hard on inflation. The Fed assumes that by stabilizing prices, long-term interest rates and employment will fall into place.

America’s Strong Job Market

It’s America’s seemingly invincible job market that has pushed benchmark Treasury yields to their longest weekly up streak since 1984. The U.S. economy lost a mind-boggling 22 million jobs in the first two months of the pandemic, but has since gained them all back, plus half a million more. After the previous recession, it took more than five years to achieve that feat. American unemployment is still at a half-century low, though last Friday’s jobs report does show indications of moderating demand, including a decline in job openings and an uptick in firings in some sectors. Almost no one thought that furious hiring pace was sustainable long-term and the labor market was always bound to cool off eventually, though it remains strong.

The Federal Reserve continues to wind down its balance sheet each month, putting upward pressure on rates. Over the past week and a half alone, we’ve seen close to 350 BPS in price movement. The heavy competition among mortgage lenders for eligible borrowers that remain can be seen in both the primary-secondary spread (the 30-day moving average of that spread is 102 BPS, close to its trailing five-year average of 107) and the elevated level of conventional 30-year lending rates over that of 30-year jumbo rates (+33 BPS, far above the trailing five average of 7 BPS).

Another 75 to 100 BPS rate hike is anticipated at the Fed’s next policy meeting on November 1-2. The Fed’s hope is to loosen up the job market and slow wage growth and we have seen signs that the cool-down is clearly underway. Hiring is slowing. Job openings are falling. Fewer people are jumping ship to other employers. While a recession remains a real possibility, there’s little sign of it yet in the data. Wage growth is still well above what the Fed considers consistent with its goal of 2 percent inflation and if policymakers want to get it down further, as they have indicated, they will have to get even more aggressive at the risk of putting more people out of work.

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.