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 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.