MBS Weekly Market Commentary Week Ending 4/1/22

As the first quarter of 2022 ended, volatility persisted in the bond market. Let’s take a look at what a flattening yield curve means and how the Fed plans to engineer a “soft landing.”


Estimates have the Federal Reserve’s nearly $3 trillion of MBS purchases since the onset of the pandemic lowering mortgage rates by 40-basis points, meaning the worst global bond rout of the modern era continued as we enter April with markets pricing in tighter monetary policy by the Fed. The first quarter of 2022 has officially ended, though we have already recorded the worst year for bonds since 1973.


The yield curve has been flattening (or, in some cases, inverting) as investors bet the Fed will tighten policy rapidly enough to risk a sustained slowdown in growth. Five-year Treasury yields rose above those on 30-year bonds this week to invert for the first time since 2006 (the spread between five-year and 10-year Treasuries inverted late last month) as shorter maturities have been selling off faster than their longer-dated peers.


As investors re-calibrate expectations for further rate hikes this year, with fed funds futures now predicting a fed funds rate between 2.5% and 2.75% by the end of the year, chatter is that the Fed may inevitably cause a recession if it gets serious about taming inflation. Data is mixed on tightenings and recessions, but the yield curve inverting is a strong recessionary indicator. Not all yield curve inversions are fatal, but rather a sign that the recent distortions are unsustainable.


The question is not whether the Fed is about to embark on a tremendous amount of tightening, but whether or not the economy is strong enough to take it. A strong labor market (Non-farm Payrolls in March were +431k while the unemployment rate came in at 3.6%) means both that the economy is at or near full employment and also that wage-based inflation pressures might dictate the Fed can take an even more aggressive approach in removing its policy accommodation. Rising wages create shortages and that causes prices to rise. While the Fed hopes supply chain issues work itself out, there seems little to cause the tight labor market to reverse course. 


A flat yield curve means a few things for mortgages, the first being that shorter duration mortgages should underperform relative to longer duration mortgages. Yet to really materialize, but something to keep an eye on: a compression on new ARM offerings relative to 15-year and 30-year fixed mortgage rates. That said, largely driven by the bank backing of these products, ARMs have been slower to move relative to the recent uptick in rates.


As bonds sell off, mortgage rates have moved inexorably higher. MBS spreads widened into the end of the quarter, meaning that mortgage rates are rising faster than Treasury rates. Much of this is based on fears that the Fed will start selling its portfolio of MBS. We aren’t quite there yet, but the market does its best to price in future expectations.


For those wondering why the Fed is still purchasing MBS despite announcing it was done, the recent Fed purchases of MBS are a reinvestment by the Fed of principal repayments and are not part of the quantitative easing, which has wound down. There should continue to be some reinvestment purchases of MBS as the Fed manages its balance sheet and makes sure that the market transitions smoothly to the Fed being much less of a market participant.


At the most recent Federal Open Market Committee meeting (the FOMC is the Fed’s main policy making body), the Fed indicated it will begin reducing its balance sheet through traditional means. This is separate from the tapering of purchasing treasuries and MBS, which ended last month. The plan will ultimately be shared at the next FOMC meeting in four weeks, but the expectation is that the Fed will not actively sell mortgages as some had feared based on previous remarks.


We are monitoring the market situation closely and will keep you informed of potential impacts to your business and pipeline.

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.

 Join Newsletter or Follow MCT on Social Media:

Previous Weekly Market Reviews by Mortgage Capital Trading (MCT)

Sign up for daily mbs market commentary and review previous commentaries by visiting our commentary category page. Join our email list for further MBS market news, subscribe to receive educational articles, whitepapers, relevant updates, and mortgage market commentary. 

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.