MBS Weekly Market Commentary Week Ending 12/9/22

The Fed’s Continued Fight Against Inflation

Last week was full of significant economic data releases, and though that was not the case this week, that gave markets plenty of time to digest the latest employment and inflation figures ahead of the Fed’s meeting (and subsequent rate hike decision) next week. Fed Chairman Powell hinted in speech last Wednesday that it might be time to reduce the magnitude of rate rates from 75 BPS to 50 BPS as inflationary data, despite being very elevated, hasn’t been getting worse.

The Fed is in its blackout ahead of next week’s FOMC events, and though the central bank has been telegraphing that it will eventually be shrinking the size of its rate increases, better than expected data has fueled speculation the Fed will keep rates higher for longer in the fight against inflation. Recall that personal income increased significantly more than analysts had expected in October, rising 0.7 percent. Spending met expectations, but came at the expense of saving with the personal savings rate falling to one of the lowest levels dating back to the 1950s. Meanwhile, employment continues to outperform with 263,000 jobs added in November.

Monetary Tightening on the Labor Market

It would seem that recent monetary tightening has, to this point, had minimal impact on labor markets, which show continued demand for workers. Over the last three months, job gains have averaged 272k. During the prior recovery, following the great recession, job gains averaged 190k per month. Current figures suggest that the economy is resilient and can handle more rate hikes and restrictive policy for longer, which has contributed toward recent poor risk sentiment. Job openings have been moderating since earlier in the year, but there are still 1.71 jobs available for each job seeker. Wage growth remains below the pace of inflation (+5.1% YOY), meaning that households will have an increasingly difficult time managing higher costs.

This week’s calendar included updates on non-manufacturing PMIs, PPI (+7.4% YOY), and consumer sentiment, but those are secondary data points to the Fed and did little to sway expectations either toward a 50 BPS or a 75 BPS hike. Bets are on the FOMC delivering a 50 BPS rate hike next week and targeting overnight rates around 4.9% by the end of 2023, with the first cut coming in 2024. Keep in mind that historically speaking, the series of 75 BPS rate hikes that have been enacted this year are a drastic shock to the economic and monetary systems.

Volatility will remain a characteristic of the mortgage sector until the Federal Reserve reaches its terminal rate (estimated) at the end of the first quarter.

Volatility will remain a characteristic of the mortgage sector until the Federal Reserve reaches its terminal rate (estimated) at the end of the first quarter. Until then is anybody’s guess. There is chatter out there that the recent rally, due to poor risk sentiment, has gone too far, too fast. 10-year U.S. Treasury yields are now 30 BPS lower than Thanksgiving and 60 BPS better than Halloween. That move has been difficult on option models and duration calculations.

Fixed Income Buying and Selling

Bond funds have seen outflows, and when fund managers need to fund redemptions, they raise capital by generally selling the most liquid part(s) of the portfolio because they can raise the most money with minimal impact on the security price. If fund managers attempted to raise funds by selling less liquid non-QM loans or junk bonds, that would depress that market, which would lower the net asset value of funds’ portfolios. As a result, capital is raised first and adjustments are made for the best returns later.

When we see a sell-off in fixed income as an asset class, as has been the case recently, MBS are the first to get whacked. Note that the Fed is now paying more in interest than it receives in income from its Treasury and MBS portfolio. The Fed pays all of its profits to the Treasury, but it is currently accumulating losses. These are in the form of an I.O.U. The Fed also does not mark its portfolio to market, which is good news because it is probably a few hundred billion dollars underwater on its MBS portfolio. When the Fed begins earning profits again, those profits will pay off the I.O.U. I’m sure there are some mortgage companies out there that wish they could pay off their losses when origination volumes pick up again in the hopefully not-so-distant future.

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.