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 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.