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 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.