MBS Weekly Market Commentary Week Ending 7/1/22

Is there more widening ahead for mortgages? The Fannie Mae 30-year current coupon spread went from +180 BPS in March 2020 to +60 BPS in April 2021, and now sits around +130 BPS. A lot of the widening potential depends on the Fed’s balance sheet, which now totals about $2.7 trillion of agency MBS. The coupons the Fed holds the most of are those that were produced over the past two years: G2SF 2% and 2.5%, UMBS30 2% and 2.5%, and the UMBS15 1.5% and 2%.

After flooding the housing sector with deluge of cheap credit since March 2020, the U.S. central bank is now looking to stem the tide. Daily Fed purchases of agency MBS are now well under $1 billion a day on the latest purchase schedule, a far cry from the record $41 billion purchased on March 27, 2020, and $36.6 billion daily average that month when the central bank ramped up QE4. 2021 saw the central bank take down an average of $5.3 billion per day in agency MBS. The 30-day trailing average of daily purchases is now at $1.3 billion, down from its high of $19 billion seen in April 2020.

The New York Fed’s latest agency mortgage bond purchase schedule takes us one step closer to the central bank allowing mortgages to simply roll off its holdings. Prepayment speeds have gone from a torrent to a trickle as most American homeowners have no refinance incentive. As a result, the runoff from the Fed’s balance sheet is not likely to hit the $35 billion per month cap that will come into effect in September – it is likely to be about $25 billion in roll off per month over the near term – meaning the roll off from the Fed’s balance sheet over the second half of this year should add another $150 to $180 billion in mortgage bond supply.

While any Fed sales of mortgages likely won’t occur until 2023, at the earliest, should the central bank engage in active selling (and that remains undetermined), those coupons mentioned in the opening paragraph are likely to see the most spread widening as a result. This will be the Fed’s third attempt to get back to an all-Treasury balance sheet and another question is how eager will money managers be to take down supply at these spreads? The recent elevated volatility has kept banks on the sidelines.

The FNMA 30-year current coupon spread over the blend of 5-year and 10-year Treasury yields is currently over two standard deviations above its trailing half-decade average. Volatility has re-entered the picture. The problem with inflation remains and slowing money supply growth will further dampen the securities market. More Fed rate hikes are coming through year-end. Year-end forecasts for the Federal Reserve rate hikes increased to 3.50% from 2.75% one month earlier.

While it is a tough time for the mortgage industry, did you really think QE4 was going to end any differently? It was always unlikely that the Fed could pour over $3 trillion of buying power into the mortgage sector and then turn off the spigot without markets reacting adversely. Now that the Fed has removed the training wheels off agency MBS, liquidity needs to develop in higher coupons so that we have better par rates, which will ease pricing issues. Lenders also must focus on cost reduction. 

Caution is warranted. Looking for more tips on how to navigate this period of increased volatility? Hopefully you attended our webinar on Improving Profitability to Counter Market Headwinds. We have also had several client-specific webinars over the last few weeks. Contact us if you are looking for a better suite of secondary marketing products or more guidance on how to manage market volatility.

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 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.

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.