MBS Weekly Market Commentary Week Ending 10/7/22

Rollercoaster Bond Market

Interesting (read: disheartening) times in this rollercoaster of a bond market, huh? There’s the highest volatility in at least five years, colossal bid-ask spreads, scant liquidity in coupons above par, falling bond prices that have banks sitting on their hands, and a central bank that is still uncertain on how long and hawkish it plans to remain in tightening mode (don’t forget fear of a global recession, escalating geopolitical tensions thanks to Russia’s war on Ukraine, the UK’s tax-cut fiasco, and the potential for further defaults by developing nations). A year ago, 2-year Treasuries yielded 0.2%. They were 1% in January of this year, but today yield more than 4%.

The root cause? Inflation remains elevated. The Fed hopes that inflation expectations don’t become entrenched and thus increase the likelihood that high inflation will persist. History has taught us that price stability is essential to achieving maximum employment over the longer term, meaning that fighting inflation comes before worrying about rising unemployment in the Fed’s eyes. Restoring price stability may take some time and will likely entail a period of below-trend growth, which the Fed is committed to, even if further steps are necessary. The only thing that would cause the Fed to pivot is the banking system coming under stress.

Banking System Stability 

Yes, the Bank of England did intervene in the UK bond market this week, committing to buy £65 billion of long-dated bonds for the sake of stability, which sparked a global rally. A bigger worry than the banking system coming under stress domestically is the potential for a housing downturn, at least with respect to prices. I’m talking about declines in housing markets that saw 30%+ home price appreciation for the last couple years, so a price correction is not unreasonable. Home prices declining in some overheated markets won’t trigger another collapse because banks don’t have much credit exposure to residential real estate lending.

August gross issuance of all agency mortgage bonds came to the lowest level since May 2019 and was the sixth consecutive monthly decline.

There are inevitable comparisons to 2008, but 2008 was a residential real estate bubble and a time when the vast majority of mortgages were not guaranteed by the government. Subprime no longer exists and, aside from non-QM (which resembles Alt-A more than subprime), every MBS is “money good.” Any exposure will be counter-party risk (e.g., those who had warehouse lines with someone like FGMC). So we won’t see a banking crisis, and we won’t see a forced selling of securities. Bottom line, fears about another 2008 are overblown.

Fed Winding Down QE4 at Opportune Time

The Federal Reserve is winding down QE4 at an opportune time. August gross issuance of all agency mortgage bonds came to the lowest level since May 2019 and was the sixth consecutive monthly decline. The $129 billion of supply in August was about 40% of the supply a year ago and just how much low mortgage rates during QE4 wrung the refi towel dry is seen in the conventional and government refinance indices since January 2021, which are down 91% and 89%, respectively. While it is hoped that money managers will fill the demand void left behind by the Federal Reserve and the banks, those are some very large shoes to fill.

The mortgage lending industry needs to get creative. It’s hard to find programs with a few points back, or even a par rate. The dramatic run-up in the price of homes combined with high inflation does give great incentive to financially stressed households to extract equity from their home to tide themselves over. Mortgage lenders have been squeezing all the equity extraction out of homeowners they can in order to keep the lights on. Unfortunately, there’s not a quick fix and it’s going to take some patience in riding out this market cycle. For further reading on the subject, check out our whitepaper from earlier this year, Understanding and Preparing for Changes in the Mortgage Market.

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.