MBS Weekly Market Commentary Week Ending 4/22/22

A year ago, you could find a 30-year fixed rate mortgage for under 3%. Today, it is over 5%. The 30-year benchmark mortgage rate primarily reflects two components: the yield on intermediate- to longer-term Treasury securities and a spread that fluctuates over time

The Federal Reserve has held Agency mortgage-backed securities (MBS) on its balance sheet since early 2009 and Fed purchases of these securities have pulled down the yield on the benchmark 30-year MBS by an estimated average of 50 basis points since that time. 

Even though Fed officials have indicated they will allow their MBS holdings to decline in coming months, this will not necessarily cause further upward movement of mortgage rates, as markets are forward-looking. There is a significant amount of near-term monetary policy tightening already priced into the market. To some extent, the recent mortgage spread widening is consistent with markets accounting for smaller Federal Reserve MBS holdings going forward. 

Additionally, Fed MBS purchases in recent years have pulled MBS yields lower than actual mortgage rates, meaning it is reasonable to expect that MBS yields will face more upward pressure than actual mortgage rates as balance sheet runoff progresses. Longer-term, markets appear priced for a fed funds rate that is closer to “neutral.” 

Mortgage rates are separate from Treasury yields, but it is still fair to ask how much higher the yield on the 10-year Treasury note will rise. There is always the potential that yields on U.S. Treasury securities could rise even further, but the recent surge in the 10-year Treasury yield is expected to slow markedly in the coming weeks, which should dampen upward pressure on mortgage rates

There are wide confidence intervals around estimates for both the timing and the magnitude of the impact from balance sheet runoff, and it is unlikely balance sheet runoff has been fully priced in yet. Odds are it is discounted by more than many might suspect, given that the process has not even yet begun. The past several months have shown that the economic outlook and expected path of monetary policy can change rapidly.

History suggests the Fed will struggle to tighten financial conditions enough to cool inflation without causing an economic contraction. While inflation is actually an indication that an economy is growing too rapidly relative to the supply of labor and other resources, the danger is that rapidly rising prices can prompt policymakers to slam the brakes on the economy

The fear is that the Fed has not acted quickly enough to get inflation under control, which now forces it into taking really drastic actions (e.g., large interest-rate hikes) which would go further than merely slowing down the economy, but plunge it into a deep recession, à la the early 1980s. The hope is that the Fed still has a decent chance of cooling down the economy and bringing down inflation without causing a recession, which is known as a “soft landing.”

All that being said, the economic outlook is highly uncertain, and mortgage rates could move higher than expectations to re-establish price stability. With a lot of sharp moves in the market, it helps to have actionable recommendations to protect your business and pipeline. Check out our most recent webinar Taper Tantrum Two? Comparing 2013 to 2022 & What Lenders Can Do. In this webinar, Phil Rasori, Justin Grant, and Andrew Rhodes compared 2013 to 2022 in terms of the deteriorating market, market liquidity in specific coupons, loan sale execution liquidity, and investor pricing performance.

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 3/24/23

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.