MBS Weekly Market Commentary Week Ending 6/3/22

Let’s take a little assessment of where we sit as a mortgage industry heading into summer. There is always headline news that drives markets – remember Brexit and the U.S. – China trade deal dominating headlines over the past couple years? The main concern currently for the U.S. economy, and thus mortgage originators, investors, and those involved with all aspects of the mortgage loan process, is how the Fed will bring down inflation while maintaining a strong economy. The Fed has a commitment to fulfilling its dual mandate of price stability and maximum employment, but with inflation beginning to have big implications on the entire financial system and Fed Chair Powell saying “maximum employment has been achieved,” the Fed is much more concerned with returning inflation toward its longer-run goal of two percent. The outlook hasn’t been great for originators, with staff reductions beginning across many companies. Let’s look at volatility, uncertainty, and how that has contributed to where we are today.

Volatility over the last several months in the bond market has been driven primarily by worries about the Fed’s quantitative tightening, or the reversal of its bond buying program. Fears have caused the TBA market to trade at extremely wide bid-ask spreads. We are in a bit of unchartered territory, as the last time the Fed tried quantitative tightening it caused major disruptions in the money market. And that was in an environment of benign inflation, which should have made reversing its policy easier. This week wrapped up “Fed speak” as we enter the black out period before the June 15 meeting. There have been no major economic surprises, and the economy continues to hum along, adding 390,000 jobs in May, which was more than expected. A 50 basis point hike is expected at the next two FOMC meetings. 

Bond market volatility seems to be calming down, which will naturally pull MBS yields closer to Treasury yields. Why? Because borrowers have the option to prepay their mortgage early, MBS investors are “short” that option. The value of that option increases as volatility increases, which increases the difference between the yield on Treasuries and MBS. MBS have been unpopular this year ahead of the Fed’s plan to increase rates and sell some of its portfolio, but are becoming a more attractive alternative to other asset classes seen as safe, such as U.S. Treasuries and investment-grade corporate bonds. There is talk that we might have already seen the highs of the year in mortgage rates, and declining volatility will help mortgage rates lower and give borrowers and originators a much needed boost.

The additional yield required by MBS investors has risen versus the beginning of the year. Couple that with declining origination volume, because high rates dissuade refinance (and some purchase) candidates and home prices having risen about 20% nationwide over the last year, and it has been a tough time for the industry. Purchasing power for borrowers has decreased during a time of record home prices and there are struggles with supply and affordability. Inflation, weaker economic growth, and reduced consumer spending all portend some headwinds. If I had to provide you a silver lining? A poor year for the mortgage industry is never a certainty – if you can remember, Q1 was bad last year before a rocketship of originations in summer created $4.5 trillion of origination volume by the end of the year.

How about another silver lining? MCT is happy to provide you resources to help weather the current market, client or not. Check out our whitepaper with MBA’s Chief Economist Mike Fratantoni from earlier this year: Understanding and Preparing for Changes in the Mortgage Market. View our recent webinar: Improving Profitability to Counter Market Headwinds. Or contact us to see how we can help with mandatory loan sales, investor set optimization, bid tape AOT, an open loan exchange, and digitizing the TBA trading process. That’s all for this week.

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.