MBS Weekly Market Commentary Week Ending 7/8/22

Let’s take a minute to look at some silver linings in the mortgage market. The last couple of months have been a volatile (read: unpleasant) time for the industry, with market sentiment torn between pushing yields higher due to Fed rate hikes and falling yields caused by recessionary fears. Originators have seen volumes drop and margins contract, leading to downsizing. We are nearing the cusp of “bad news is good news,” where economic weakness is interpreted as good news for medium-term economic growth because it means the Fed may ease up on the brakes. 

The FOMC minutes from the June 14/15 meeting showed that the Fed is worried most about inflationary expectations becoming entrenched in the economy and the central bank indicated a willingness to cause a recession to defeat inflation. The 2s-10s spread inverted this week, historically an early warning sign of a recession. The biggest mistake, in the Fed’s opinion, would be to fail to restore price stability. The problem for the Fed is that interest rates are still highly negative on an inflation-adjusted basis. So, even though the Fed is being aggressive in hiking rates, overall monetary policy remains highly accommodative.

A primary concern for the MBS market in the second half this year will be the additional net supply thrown onto the market by the Federal Reserve’s change in monetary policy. Expectations are for between $150 and $180 billion in total runoff from the Fed’s balance sheet to hit the market by year’s end, combined with the conspicuous absence of the Desk’s daily MBS purchase operations. Current expectations are for another 75 BPS at the July FOMC meeting, 50 BPS in September, then 25 BPS in November and December. That is still a lot of tightening to go, and since the Fed Funds rate tends to impact the economy with a roughly nine-month lag, we haven’t even begun to feel the impact of the rate hikes we have already seen.

Forgetting the Fed Funds rate for a moment and looking at MBS, the absence of quantitative easing does not necessarily connote “quantitative tightening,” at least until the Fed begins to actively sell MBS. Yes, there is balance sheet runoff from early payoffs, but some of that is being reinvested in MBS and the minutes from the June 14/15 FOMC meeting made no mention of MBS sales. As has been broadly discussed, the Fed is attempting turn down the heat on demand (and the broader consumer economy) without causing undue hardship for firms that rely on mortgage finance.

The drop of mortgage refinancing activity due to higher rates and receding from the en fuego purchase market from the last two years will help ease the flooding of MBS supply. The type of bonds created via refinancing (the 10-year, 15-year and 20-year variety) have predictably dropped a larger percentage than aggregate gross issuance for agency mortgage bonds. Agency mortgage bonds have the advantage over investment-grade corporate bonds of having no credit risk, which in an uncertain economic environment grants it a significant advantage.

Given where rates have headed, many lenders have been exploring new product offerings, including ARMs. We have seen some questions surrounding pricing. Fortunately, issuance is picking up and July is shaping up to be a solid month based upon forward sales. For any secondary marketing concerns or questions you may have, feel free to contact us or reach out to your MCT trader.

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.