MBS Weekly Market Commentary Week Ending 8/5/22

The primary driver of movement in the bond market this week was always going to be the July employment situation report, which came out this morning and showed that the U.S. economy added 528,000 jobs over the past month. Expectations were for the economy to have added 230,000 jobs after adding 372,000 in June. This is the highest monthly jobs gained in five months and the unemployment rate ticked down to 3.5%. The report has large implications for the near-term path of Fed rate hikes and MBS pricing. The recent rally in the bond market was due to investor hope that the Fed would be less aggressive going forward. That will not be the case.

The labor market is still strengthening, not weakening, which is consistent with an economy in expansion during an inflationary boom. Talk of a recession is premature. The report, which is the latest chance to gauge the strength of the U.S. economy, makes the Fed’s job harder, as a booming labor market will likely force the Fed to raise rates by 75 BPS for the third consecutive time at its next meeting in September. Wage growth, which climbed 0.5% for the month (picking up from 0.3% in June) and 5.2% over the last year feeds into the narrative that we are yet to reach peak inflation.

The strong payrolls report validates the Fed’s view of a resilient economy that can withstand additional rate hikes. Bond yields had been falling on the hope that the Fed will pivot to a more normal policy as the economy weakens, but the report endorses much of this week’s Fedspeak that sought to jawbone rate expectations. A handful of Fed officials this week reiterated the central bank’s resolve to bring down high prices; St. Louis Fed President Bullard said that the central bank will continue raising rates until it sees compelling evidence that inflation is falling. He added that he expects roughly another 1.5 percentage points of interest rate increases this year. Minneapolis Fed President Kashkari said that the central bank is committed to doing what is necessary to bring down demand to reach policymakers’ 2% long-term inflation goal, which remains far off.

This payroll report shows that Fed has a lot more work to do in getting aggressive and pushing up rates, which makes the “soft landing” scenario seem less likely. Expectations for Fed policy have already been recalibrated, with a hike of 0.75%  the most likely scenario at the September meeting as the central bank fights inflation. Treasury prices sank in the wake of the report. There will be one more jobs report released before the September FOMC meeting, but this report confirms the need for the Fed to continue tightening, and Fed officials have come out in favor of front-loading rate hikes during this tightening cycle.

While the possibility of a dovish pivot that Fed Chair Jerome Powell hinted at last week has diminished, volatility persists in the bond market. 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 published several blogs over the last few weeks, including Strategies for Mitigating Risk in a Volatile Market, which provide more subject matter on the current market. As always, 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.