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 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 1/20/23

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.

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.