MBS Weekly Market Commentary Week Ending 12/2/22

Powell’s Dovish Remarks

We had three different types of news this week that tangibly impacted bond prices. Federal Reserve Chair Powell tried to walk the tightrope between stressing that the central bank’s inflation fight is far from over and telegraphing that policymakers could downshift from their rapid pace of tightening as soon as the December 13-14 FOMC meeting. The Fed’s publicly preferred measure of inflation, the PCE Core Price Index, which excludes food and energy, was expected to increase 5% year-over-year, but increased 6% (not exactly a downward trend). And the economy added 263,000 jobs in November, which was better than 200,000 estimates as wage inflation continues to increase: average hourly earnings rose 0.6% from October. 

In Powell’s remarks from Wednesday, he stated that the biggest component of core inflation, services excluding-housing (the other two largest components are goods and housing services), is driven by wage inflation. Stubbornly high core inflation is the result of an extraordinarily tight labor market, which we saw today still has plenty of steam. The Fed would like to see more balanced supply and demand in the labor market, either through a reduction in demand for workers after the economy has been cooled with rate hikes, or more supply if workers who left during COVID return. The latter is a much more natural solution, but one the Fed has no influence over.

Rate Hike Moderation Incoming?

The Fed’s most aggressive actions since the 1980’s this year have lifted the target range of their benchmark rate from nearly zero in March to a current 3.75% to 4%. Following four straight 75 BPS moves and despite the hawkish jobs report, expectations are now heavily leaning toward a 50 BPS hike after the Fed’s December 13-14 meeting rather than 75 BPS. The only other major report between then and now is CPI on the morning the Fed begins their meeting. There are rising odds of a rate cut by next November, but before we get ahead of ourselves, remember that rates are set to rise further and stay at restrictive levels for some time. Terminal Fed funds estimates remain around a 5.0% range.

While the central bank is still preoccupied with trying to land the plane without cratering the runway, investors have become optimistic that they are starting to see some light at the end of the tunnel when it comes to rate hikes. This optimism has shown up across a range of assets, and Treasury yields were down 30 BPS in November. Mortgage rates in the U.S. fell for a third straight week this week, and now sit at the lowest level in more than two months, offering some slight relief to would-be homebuyers. 

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.

There is so much uncertainty in the forecast though. Powell stressed that the timing of that moderation is far less significant than the questions of how much further rates will need to rise to control inflation and the length of time it will be necessary to hold policy at a restrictive level. Tighter policy and slower growth over the past year have not caused enough strong evidence to make a convincing case that inflation will soon decelerate. The path ahead for inflation remains highly uncertain. When it comes to the (inverted) yield curve, further declines in long term rates will be more difficult to come by and more fleeting, as the 2-year has been driven primarily by the Fed Funds projection while the 10-year has been driven by market sentiment.

Uncertainty or Scarcity

Uncertainty isn’t so much the word in the origination space rather than scarcity. November gross issuance of all agency mortgage bonds was down nearly 15% from the prior month and 65% YOY, registering at just $82 billion, the eighth consecutive monthly decline and lowest monthly total since March 2019. Overall agency mortgage bond gross issuance year-to-date stands at $1.6 trillion, and is forecasted to end the year between $1.7 or $1.8 trillion. While this would still be above the $1.3 trillion annual average seen during the 2000 through 2019 period, it would also be far below the $3.3 trillion average seen in 2020 and 2021. Forecasts are for around $1.2 trillion gross issuance for 2023.

We’ve seen 4.5% and 5% coupon issuance fall off, while 5.5% through 6.5% are increasing. It’s tough times out there, but keep in mind that the December through February period is historically the kindest period for mortgage excess return performance. Until then, we recommend reviewing your strategy when trading higher less-liquid coupons as wider rolls will start to come in with liquidity. Finally, profitable mortgage companies are earning all or nearly all of their profits from servicing income or servicing portfolio valuation adjustments instead of from originations. Reach out to our MSR team for help on that side of things.

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 2/3/23

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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.