MBS spreads, basically the yield on a mortgage backed security minus the yield on the corresponding treasury, continue to widen, along with bid-ask spreads in the TBA market. This has made the TBA market more illiquid than usual, which is having an impact on front-end rate sheets. Bid-ask spreads have increased from about one tick to 10 ticks, an increase of nearly 30 basis points.
Like TBA spreads, MBS spreads are wider than historical averages, though not quite at the wide levels of early 2020. The last check showed spreads around 1.15% versus historical averages around 0.9%. Price differences between the months are increasing as rates rise, which will translate into higher lock costs. The Federal Reserve is all but certain to hike the Fed funds rate 50 basis points at its May meeting, and even though it has been clearly telegraphed, we have seen a sell-off regardless.
Though all the above factors have led to mortgage rates being less sensitive to the movements of the 10-year U.S. Treasury, 30-year fixed-rate mortgage rates have not been this high since February 2011. There are some indications that mortgage rates would move lower if the 10-year U.S. Treasury stabilizes.
Much of this is being driven by fears of the Federal Reserve’s imminent tightening of monetary policy, which includes an exit from the MBS market. After helping manage currency and acting as the lender of last resort for most of the Federal Reserve’s existence (since being established in 1913), it has now been tasked with buying up assets to support the economy. The Federal Reserve’s balance sheet has $8.9 trillion of assets, which should be a high-water mark since the Fed is expected to start reducing its balance sheet soon.
While yield-curve inversion, like we saw last week, adds to the narrative around growth risks, a recession is not necessarily imminent, at least this year. Markets currently fear that the Fed is going to cause a recession in 2023 as increasing interest rates stifle economic growth. There are several reasons that may not be the case as we have strong buffers against a slowdown. The employment market is still red-hot, corporate bond yields have not risen, and economic indices are still well above any level from the decade before March 2021.
With a lot of sharp moves in the market this week, it helps to have actionable recommendations to protect your business and pipeline. Join MCT for an Industry Webinar on April 19th at 11AM PT titled Taper Tantrum Two? Comparing 2013 to 2022 & What Lenders Can Do. In this webinar, MCT’s Phil Rasori, Justin Grant, and Andrew Rhodes will compare 2013 to 2022 in terms of the deteriorating market, market liquidity in specific coupons, loan sale execution liquidity, and investor pricing performance.