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 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.