MBS Weekly Market Commentary Week Ending 11/4/22

Labor Market Still on Solid Footing

We were reminded this week that the U.S. labor market is still on solid footing, aiding to speculation that the Federal Reserve will continue its aggressive rate hiking path beyond Wednesday’s 75 BPS rate increase. Today, we learned that October payrolls beat expectations (the headline figure came in at 261k, and there was a positive back month revision of 29k), which further complicates Fed’s job and lowers the odds of the mythical “soft landing.” While the immediate aftermath of the Fed statement saw stocks and bonds rally as there were indications that the Fed was open to the possibility of a pause in rate hikes, the press conference poured cold water on that as Powell said it is “very premature” to be thinking about pausing and that “we have a ways to go on rates.” 

Bond Markets Back in Selling Mood

Investors, in particular, focused on a piece saying that, “In determining the pace of future increases in the target range, the Committee will take into account the cumulative tightening of monetary policy, the lags with which monetary policy affects economic activity and inflation, and economic and financial developments.” That is a change of pace rather than pause or a pivot. Further, Chair Powell began his opening remarks during the press conference by stating, “we still have some ways to go” with rate hikes and that any talk of a pause in rate increases is premature. He emphasized that no decision has been made and it was likely that at the next meeting the FOMC would have a discussion about it.

So, back to selling went the bond markets, as the prevailing sentiment is now that the Fed is far from the point where it can lift its foot off the economic brake and declare victory over inflation. One positive was that Chair Powell did signal that further rate hikes might be smaller. The December Fed Funds futures have a toss-up between 50 BPS and 75 BPS with another 25 BPS to 50 BPS of tightening priced in for the entirety of 2023. If the Fed’s next dot plot in December indicates that the tightening cycle is largely done, we should see a large rally in MBS and corresponding drop in mortgage rates.​

The volatility seen in mortgage rates this year should subside once 1) the peak rate for this hiking cycle comes into view, and 2) inflation begins to slow.

Mortgage rates are based on what MBS investors are willing to pay for these securities. When spreads are large, as they are now, MBS are “cheap” relative to Treasuries. When spreads are narrow, as they were to begin last year, you could say that MBS are “rich.” MBS spreads are wider than the depths of the financial crisis. Bond fund managers constantly swap in and out of different fixed income asset classes to find the best returns, and at some point bond investors will flood into MBS to take advantage of a government-guaranteed rate of return far in excess of Treasuries, which should put some downward pressure on mortgage rates.

Volatility and Associated Problems

The volatility seen in mortgage rates this year as we have progressed up the coupon stack should also subside once 1) the peak rate for this hiking cycle comes into view, and 2) inflation begins to slow. Once inflation is contained, not only should volatility subside, but mortgage rates will start to drift lower. Unfortunately, it may be another year or two until that happens, and the Fed seems firmly in the camp of those who see the job market as too hot. Today’s payrolls report did not help matters.

Keep in mind that the biggest problem facing the economy right now is that prices are rising far too quickly from the lingering effects of the pandemic, which continue to disrupt international supply chains, and the war in Ukraine, which has pushed up the price of food and energy. Inflation is also at least partly the result of excessive demand. Between now and December, we receive additional readings of the consumer price index and the PCE price index. Which path policymakers choose moving forward depends not solely on inflation, but in part on how Fed Chair Powell and his colleagues view the labor market. 

If U.S. companies keep adding jobs and raising pay, inflation will remain stubbornly high and the Fed is likely to remain aggressive. If there are indications of job growth stalling and unemployment rising, the Fed would likely pause sooner to avoid causing a recession. Unfortunately, it would seem we are in what could already be called a “housing recession.” Elevated mortgage rates, combined with steep home-price growth from the past couple of years, have greatly reduced affordability. Home sales have slowed to a crawl and the rise in interest rates over the course of 2022 has hurt the willingness and ability of potential home buyers to enter the market. It’s also hurt potential home sellers who are locked in to low rates and not willing to reduce sales prices materially enough to motivate buyers. Until we have some clarity on how quickly this housing recession spreads to the rest of the economy, MBS spreads and mortgage rates should remain elevated.

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.