MBS Weekly Market Commentary Week Ending 12/30/22

A Quiet Close to the Year

There is never much going on in the bond markets the week between Christmas and New Year’s, so I won’t waste your time with filler. And it was a quiet week as investors and mortgage bankers wrapped up a year they would love to forget. Even the brightest individuals involved in the bond markets failed to appreciate the outbreak of inflation, how the Fed would react (rate hikes were supposed to be measured rather than decisive), and failed to predict the worst rout in bonds since at least the 1970s.

As today’s daily MCT market commentary mentioned, the 10-year yield opened 2022 at 1.628% and essentially made an upward beeline to its peak in mid-October of 4.226%. The average 30-year fixed rate mortgage climbed from 3.125% to 7.125% in late October and now hovers near 6.375%. This week’s Primary Mortgage Market Survey from Freddie Mac saw the 30-year mortgage rate rising for the first time since the week ending November 10.

Yield Curve Behavior

The front and back ends of the yield curve experienced imbalanced behavior all year long, influencing adjustable rate versus 30-year fixed rate mortgage pricing. The yield curve steepening helps ARM rates compared to 30-year fixed rates, and vice versa. The front end faced more selling pressure than the back end of the curve, leaving the 2s10s spread inverted by more than 50 BPS to close the trading year. 

Inflation rose from a 7% annualized rate at the start of the year to a high of 9.1% in June. The Fed responded with four 75 BPS rate hikes followed by 50 BPS at its December meeting. The resulting volatility and uncertainty surrounding the Fed’s path and its ultimate impact on the economy drove the narrative over the course of the year. Investors continue(d) to search for clues and context amidst few economic releases this week.

Inflation rose from a 7% annualized rate at the start of the year to a high of 9.1% in June. The Fed responded with four 75 BPS rate hikes followed by 50 BPS at its December meeting.

As the year draws to a close, economic data remains mixed with some areas humming along and others clearly struggling. One of those struggling is housing. Home prices rose more than 20% year-over-year in some areas, but U.S. homebuilder sentiment fell every month in 2022, sinking in December to a level not seen in over a decade outside of the pandemic (building costs are higher due to inflation, but home prices have started to fall). Permits for new residential construction fell 11.2 percent in November, indicating that housing starts will be lower for some time. Permits are off 29 percent from their peak last December. Existing home sales were down 7.7 percent in November, have fallen 37 percent since the beginning of the year, and are at their slowest pace since May 2020. New home sales are down 23 percent since January. 

Housing and Labor Market Interplay

Elevated mortgage rates and high construction costs have hurt affordability, especially for first time homebuyers. Sellers have started responding to buyers hesitating not only at the prices being asked, but their reduced ability to repay monthly payments, through reducing prices. Both new and existing home sale median prices dropped from their recent record highs: home prices are now rising at the slowest pace since April 2021, and signs point to prices in the housing market having peaked in June 2022. Don’t forget, high mortgage rates have made homeowners who would like to move side towards hunkering down with their 3.5% mortgage and waiting it out, hurting housing supply.

One area humming along, for now, is the labor market, which continues to prove resilient despite other measures of weakness. Workers are still too hard to find, bad news when it comes to wage inflation. In fact, the strong labor market has provided much of the rationale for the Fed’s 75 BPS rate increases, the thinking being that the economy can handle severe monetary tightening. Initial and continuing jobless claims remain historically low, though the tight domestic labor market is showing some signs of loosening based on the time it is taking for displaced employees to find new positions.

The Federal Reserve has made clear its commitment to driving a stake through inflation, even if it means a possible recession. Even with the recent moderation in rate hikes, Chair Powell noted in his most latest press conference that, “We are not at a sufficiently restrictive policy stance yet,” and the “strong view on the FOMC is we need to hold rates at peak until we are really confident inflation is coming down in a sustained way.” The central bank’s fight looks far from over and the Fed has signaled it won’t be deterred in its fight against inflation. I don’t know if it’s much solace, but things can’t get much worse in 2023. Hopefully you enjoy your last days of 2022 and we will see you in the new year!

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

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.

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.