MBS Weekly Market Commentary Week Ending 3/10/23

25 or 50?

Since I have been on vacation since Valentine’s Day, maybe it’s still apropos to say, “Roses are red, violets are blue, this hawkish Fed is content sending rates to the moon!” Fed Chairman Powell’s hawkish tone in front of Congress this week (at least temporarily) dashed hopes of slower rate hikes or reductions. Today’s payrolls report was solid, with the economy adding 311k jobs in February. Prior months were revised lower, unemployment rose to 3.6% (from 3.4%), and earnings were up slightly. 

While I’m not ready to lean toward 50 basis points as the outcome of this next Fed meeting, 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 the increasing costs of inflation, and in turn trigger more price increases. In fact, inflation remains high in large part 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. 

Did you miss it? Our Market Commentary – Special Feature post reviewed changes to the Loan Level Price Adjustment (LLPA) matrix, Wells Fargo’s exit from the correspondent lending space, and the U.S. breaching its debt ceiling.

Sticky Inflation

As U.S. inflation receded over the past few months, some economists warned that inflation would be sticky, meaning it would seemingly retreat only to gum up the works again. That feared persistence could push the Fed to raise rates for longer. Precisely how much higher the federal funds rate will need to go and for how long policy will need to remain restrictive will depend on how much demand is slowing, supply challenges are being resolved, and price pressures are easing. This puts a lot of weight on the Consumer Price Index this upcoming Tuesday (we will also have another look at PPI prior to the Fed’s rate decision on March 22). 

There exists a raging debate among economists over whether we’ll need a sharp rise in unemployment to keep inflation low.


Banking Sector Woes

One thing that would lead to the Fed quickly halting its tightening regime are troubles in the banking sector, and we had a pretty big bond rally the latter half of this week with some bank news regarding Silicon Valley Bank. Silicon Valley Bank announced it needs to raise $2.25 billion in new capital to shore up its balance sheet through two offerings and a private placement to offset a $1.8 billion loss on some bond sales consisting mostly of low-interest U.S. Treasuries, sinking its stock price by more than 60%. 

Too many customers tapping their deposits at once, known as a “bank run,” can trigger sector contagion. Banking crises have a tendency to spread into unanticipated spaces (e.g., the subprime crisis freezing up the commercial paper market). We have been seeing bankruptcies in the commercial mortgage space, so this is something to keep an eye on. For mortgage originators, this means even tighter credit from warehouse banks and liquidity risk for non-QM products. This also means an even more inverted yield curve as investors flock to safe assets. In fact, the 2s – 10s spread went negative more than 100 basis points this week, which is the most inverted the yield curve has been since just before the 1981-82 recession.

Ready for some good news? That flight to safe assets, such as MBS (which are more or less guaranteed by the government), would lead to much lower rates. Additionally, purchase and refinance mortgage lending are expected to hit a floor in the first quarter of 2023. The overall economy remains robust, driven by a robust labor market and resilient spending. Though the Fed’s timeline for snuffing out high prices is hard to predict, and an inverted yield curve creates headwinds for those such as mortgage companies that are borrowing short and lending long, volatility should come back down as investors are getting close to coming to terms with the peak of the Fed’s tightening cycle.

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 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.

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.