MBS Weekly Market Commentary Week Ending 6/24/22

Volatility, especially for those not utilizing mortgage pipeline hedging, can erode profit margin rapidly. Since the Fed announced a 75 bps rate hike last week, we have seen increased volatility amid markets attempting to come to grips with how to weigh inflation concerns versus recession concerns. As these stagflation worries rage, we saw a large decline in the MBS market leading up to the FOMC meeting and a massive rally in the market this week.

Last month’s increase in the inflation rate to 8.6% (squashing any talk of peak inflation being in the rearview mirror) and Fed’s pivot from an expected 50 bps rate hike to an actual 75 bps rate hike at its June meeting has also increased market expectations for the size of upcoming rate hikes by the FOMC. To simplify things, higher interest rates increase the costs of things like mortgage loans and company borrowing, which slows business growth and translates into less hiring. As the job market weakens, paycheck growth slows and further tamps down spending activity.

Fed policy is meant to influence the demand side of the equation. When fewer people shop for houses because home loans are expensive and the economy feels less secure, a smaller supply might be enough to satiate demand without causing prices to keep rising. But make no mistake: crushing demand is at best unpleasant and often agonizing. To provide some historical context, the Fed pushed interest rates to double-digit levels in the early 1980s to bring down rapid inflation, but that caused back-to-back recessions that pushed the unemployment rate to nearly 11 percent. The economy is humming along right now with the unemployment rate at the  low level of 3.6 percent, but that rate is expected to rise as the Fed continues to tighten policy.

Fed Chair Powell headed to Capitol Hill this week for his semiannual Congressional testimony. He reiterated the Fed’s commitment to reducing inflation and candidly admitted a recession is a possibility. The pace of rate changes will continue to depend on the incoming data and evolving outlook for the economy. That uncertainty is anathema to those tasked with managing margins.

Risk is inherent for anybody involved in the loan sale process, but there are sound ways to mitigate risk in volatile and deteriorating markets. We are seeing higher coupons being originated than what the Fed is purchasing as we have moved toward the 5 and 5.5 as the new market coupons. Newly traded coupons are experiencing abnormally wide bid-offer spreads, especially for GNMA securities. In times like these, stay on top of production and roll out of non-production traded coupons to reduce basis risk exposure.

When it comes to pricing and locking, either discontinue granting or avoid free extensions if you have not already. Limit or discontinue locks outside of market hours, including overnight and weekends. We have seen some clients add in temporary margin to offset the risk of market volatility, and this can typically be programmed in your PPE without having to affect core company margins.

When it comes to originations, non-vanilla product talk was all the rage at the recent Mortgage Bankers Association Secondary Marketing Conference in May. Lenders are looking for secondary market outlets and premium pricing for ARMs, home equity products, non-QM, second homes, and investment properties, and other non-conforming products. Lenders are also looking for extended locks, lock and shop programs, rate buydown products, and construction financing options.

While the next year or two for the mortgage industry are certain to be less enjoyable than the past year or two, market cycles are an expected and manageable part of doing business. Having a scalable and efficient operation is the name of the game. And for secondary marketing heads, being appropriately covered to minimize interest rate exposure is paramount. Keep communication with your trading team a top priority and reach out to your MCT trader with and questions or concerns you may have.

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.