MBS Weekly Market Commentary Week Ending 3/24/23

Read Beyond the 25 BPS

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).

Many market observers were calling for the Fed to pause hikes due to the banking crisis, but the situation is still so new that the Fed doesn’t have a read on the fallout yet. Raising rates in the face of a banking crisis signals that the Fed believes there is work remaining to be done. The Fed did discuss the recent turmoil, with the Committee estimating that it will restrict credit going forward for households and businesses and will weigh on economic activity. The extent of these effects is uncertain, though the statement added that “the U.S. banking system is sound and resilient and the Committee remains highly attentive to inflation risks.”

If you haven’t already, we recommend reading our latest blog, March Housing Market Update: After Silicon Valley Bank Collapse, which details recent changes to the composition of bank portfolios and how we got to this point. Silicon Valley Bank’s cardinal sin was to buy Treasuries and MBS without hedging the interest rate risk. When the bank was met with a deluge of withdrawal requests, it sold its available-for-sale securities at a loss in the hope it would cover withdrawals. 

Tightening Credit Conditions

The more credit tightens on its own, the less the Fed will need to do to bring down inflation. Keep in mind that any general restriction of credit will take some time to play out. So far, the Fed is not seeing any decrease in credit from the banking crisis, and therefore they didn’t feel the need to pause or cut rates. The Fed facility and discount window lending are working as intended to provide liquidity to the banking system and aggregate deposit outflows from regional banks have stabilized. From a consumer credit perspective, the impact of further rate hikes will likely continue to be felt by borrowers, particularly in mortgages and credit cards.

The updated Summary of Economic Projections indicated one more 25 basis point hike, but to counterbalance the softening language around future rate increases, the Committee added the assessment that it will be appropriate to keep rates “restrictive for some time.” While the Fed expects another raise, the increasing focus on the banking sector has market expectations pricing in no further hikes and 75 basis points of easing by year-end. Chair Powell sounded more sheepish than dovish in his press conference, though said that “participants don’t see rate cuts this year” and that “rate cuts this year are not our baseline expectation.”

The fed funds futures will get more hawkish and markets will move toward being “risk-on” the more sound bets become that the banking crisis is over.


Another False Start?

As real as this Fed pivot feels, we cannot forget about two previous false starts that hurt mortgage P&Ls. Last July, mortgage rates dipped 70 basis points and S-curves went hypersonic. Then, after Chair Powell’s Nov 30th speech where 25 of 26 paragraphs were blatantly hawkish yet the screen chose to hear “rate cuts are coming,” that correction evolved into a negative feedback loop because banks happened to be moving certain assets from held for investment to available for sale, either for liquidity purposes or perhaps because they saw a markup event on the horizon. 

2022 ended with a couple of moderating CPI prints, convincing the bond market that the Fed was accomplishing its mission. However, the January and February CPI prints, along with a robust January payrolls report, caused investors to re-think that forecast, spiking rates. The latest banking crisis has massively increased uncertainty over future Fed moves, bringing volatility back to the fore. MBS spreads are a function of interest rate volatility: when interest rate volatility rises, mortgage backed securities underperform Treasuries. The punch line currently is that this uncertainty has caused mortgage backed securities to hold relatively steady while Treasury yields fall. 

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 3/17/23

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.

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.