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 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.