MBS Weekly Market Commentary Week Ending 3/31/23

“Too Far, Too Fast”

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.

Mortgage traders over the past month have priced prepayment speeds too fast, with curve-implied durations too short. That was evident in the stack compression and coupon swaps trading “fast.” In practice, S-curves aren’t that sensitive. Even with the basis all over the place, pipeline hedgers still have to manage that movement when adding or lifting coverage.

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. 

Spreads Spreading

The money supply continues to drop, forcing mortgage spreads wider, volatility higher, and agency MBS issuance down. Rates are not set by the Treasury market, but rather the TBA market where capital markets folks can sell their loans. Even though the MBS basis has been driven wider by interest rate volatility, currently sitting near 300 bps versus the five-year average of slightly more than 210 bps, the primary/secondary spread is right around its trailing five-year average of roughly 110 bps.

The Fed’s tightening policy still has had little to no effect on the labor market.


Peak Fed Funds Rate = Normalcy?

Today, inflated prices, high interest rates, and few active listings continue to make both finding and buying a house extremely difficult, and refinance appetite non-existent. While the current environment is not primed to change anytime soon, the peak of the Fed’s tightening cycle should help markets to price in lower yields and steeper curves. The trouble for the Fed is that there are excellent reasons for it to continue raising interest rates and excellent reasons for it to take a break. The fed funds futures now see a coin flip for another 25 bps hike in either May or June to get to a Fed funds rate of 5%, and then they see the Fed beginning to cut rates. 

It was wonderful seeing everyone in San Diego last week for this year’s MCT Exchange! For those that attended, we hope you enjoyed the general sessions, a keynote from Fannie Mae’s Doug Duncan, as well as the roundtables and breakout sessions! Get a full snapshot of the event by reading through our recap post, viewing the slide decks of each session, and checking out the event photo gallery. You can find market forecasts from Fannie Mae Chief Economist Doug Duncan, the latest on MCT’s vision for the secondary market, and valuable strategies from lenders and experts.

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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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.

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.