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.

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Previous Weekly Market Reviews by Mortgage Capital Trading (MCT)

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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.

MBS Weekly Market Commentary Week Ending 1/20/23

Have you heard? Inflation was so 2022. All jokes aside, after we learned last week that U.S. inflation cooled for the sixth consecutive month (the consumer price index dropped 0.1% in December compared to the month prior), expectations are now that the Federal Reserve is likely to downshift rate hikes to 25 BPS going forward, beginning at next month’s FOMC meeting.

MBS Weekly Market Commentary Week Ending 1/13/23

Pay attention to the bond market rather than the Fed. That’s what I’m hearing as we learned this week that inflation continued to ease in December, though much focus was also on Wells’ exit from the correspondent space and its ramifications. The headline CPI (-0.1% month-over-month, +6.5% year-over-year) posted the slowest inflation rate in more than a year and core inflation (+5.7% year-over-year), which excludes food and energy, also posted the smallest advance in a year.

MBS Weekly Market Commentary Week Ending 1/6/23

While it’s back to business as usual, it was a fairly quiet week as we settled into the new year. Fast inflation and high interest rates dominated the narrative and upended markets across the world last year. When the dust settled, 10-year Treasuries were 200+ BPS higher than the start of the year, the curve inverted in a bearish fashion faster and farther than ever, implied volume spiked, and mortgage spreads were pushed from stubbornly rich to suddenly cheap. The result was an entire trade-able universe moving out of the money, originations grinding to a halt, and duration becoming a function of illiquid trade flows.

MBS Weekly Market Commentary Week Ending 12/23/22

MCT would like to wish everyone a Merry Christmas and Happy Holidays. Talk to close the year has been dominated by the Federal Reserve’s most aggressive policy tightening in four decades and its impact on the economy, and for us the residential housing market.