MBS Weekly Market Commentary Week Ending 4/8/22

Increased market volatility continued this week as the main headline was the Fed mentioning in the Minutes from the March 15/16 FOMC meeting that it plans on a more aggressive approach to the shrinking of its $9 trillion balance sheet than has been done in previous wind-downs. The Fed will decrease its balance sheet starting next month as it stops purchasing MBS and instead lets its assets run off the balance sheet over time. 


As the Fed begins to enact its plan to reduce the size of its MBS holdings, investors are curious to see how quickly the Fed plans to do so. There was agreement indicated in the Minutes of a maximum pace of $95 billion a month ($60 billion for Treasury securities and about $35 billion for Agency MBS) with the caps phased in over a three-month period, or slightly longer if needed. The balance sheet reduction will further tighten credit across the economy as the central bank raises interest rates to cool inflation. 


There was also some agreement that “after balance sheet runoff was well under way, it will be appropriate to consider sales of Agency MBS to enable suitable progress toward a longer-run SOMA portfolio composed primarily of Treasury securities.” With the Fed focused on tamping down inflation, likely inflicting more losses, Treasuries continued their selloff and mortgage rates continued to rise this week.


The highest inflation readings in decades have raised the question of whether the Fed’s dual mandate of 2% inflation and full employment are compatible at the moment. The Fed’s fight to find its neutral state, which neither speeds nor slows growth, is a balancing act it has found challenging to figure out. The economy is generally strong, with low unemployment and decent growth. The Fed suggests it can cool off inflation without driving up unemployment or causing a recession, but such a “soft landing” sounds unlikely in what is expected to be the sharpest tightening in almost three decades.


Chair Powell believes it is possible, but indicated the Fed will prioritize reducing inflation and returning the economy to price stability, which is a major policy shift with unknown implications. Many critics have suggested the Fed has now waited so long to enact stricter monetary policy to respond to inflation that it will inevitably now send the U.S. economy tumbling towards a recession next year. “We do feel that the economy is very strong and well positioned to withstand tighter monetary policy,” said Powell. This recovery has been considerably stronger and faster than in the previous cycle.


He also believes that current global supply-chain problems, which have contributed greatly to the rise in inflation, should eventually recede. Inflation is expected to remain high through the middle of the year before starting to decline. Powell replied that the Fed’s goal was to “better align demand and supply” by nudging down interest-sensitive demand and giving workers more time to return to the labor force after covid. “The plan is to restore price stability while also sustaining a strong labor market,” he said. 


During previous periods of high inflation, central banks have sometimes raised interest rates rapidly, and to such a degree that the demand for goods and services fell to the degree that firms were forced to lay off workers, sending the unemployment rate skyrocketing. With more people competing for each job, downward pressure was exerted on wages and other costs, and it was this brute force that eventually brought down the inflation rate. Since the start of the pandemic, Powell’s Fed has emphasized the need to give the economy time to recover fully


Considering that MBS spreads have widened considerably, concerns persist that the Fed unwind may drain liquidity from the system and trigger higher borrowing costs and spikes in volatility. As a result of this increased volatility, investors have been tightening their rate sheets and policies. Many of the lower note rates have been completely removed depending on the aggregator or agency. Anything 3.25% and below on a 30-year that is still in the open pipeline should be either closed or canceled in the next few weeks. And even if an extension is being charged to the borrower, consider the liquidity of that production.


Looking for 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.

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.