MBS Weekly Market Commentary Week Ending 9/16/22

Fed’s choice between a soft landing or bringing down inflation

We received several inflation data points this week, all of which point to another large Fed rate hike (either 75 or 100 BPS) at its September 20/21 FOMC meeting. The Fed went from saying “we’re going to try to have a soft landing and bring down inflation” earlier this year to now signaling it has a choice between a soft landing or bringing down inflation. And the central bank is intent on bringing down inflation through a crackdown on economic growth.

There are the unfortunate costs of reducing inflation (higher interest rates, slower growth, and softer labor market conditions) that will bring some pain to households and businesses, but a failure to restore price stability would mean far greater economic pain. Markets have interpreted recent Fed comments as: “We are going to raise rates higher and keep them there longer than the market is anticipating. People now understand the seriousness of our commitment to getting inflation back down to 2%. If we have a hard landing and cause a recession, so be it.”

Restoring price stability will take some time

Restoring price stability will take some time and requires forceful action to bring demand and supply into better balance. The Fed wants to see demand destruction, not just an improvement on the supply side. Read another way, falling commodity prices and an improvement in supply chain issues are necessary, but not sufficient, to get the Fed to pivot towards a more accommodative monetary policy. On the bright side, the housing supply – demand imbalance should likely prevent a nationwide home price decline of large significance. This is more of a “buyer’s strike” than a “forced selling” event.

The Fed likely wants to see at least 4% unemployment before it thinks of pulling back. And a fed funds rate of above 4% is expected by the end of the year.

More important than the policy action at this upcoming meeting will be the path forward and communication of that path.

Chair Powell is expected to expand on the Committee’s view that at some point ratcheting down the pace of hikes will be appropriate. Markets are looking for specific metrics that the Fed will be targeting. The Fed likely wants to see at least 4% unemployment before it thinks of pulling back. And a fed funds rate of above 4% is expected by the end of the year.

As risks tilt slightly towards higher rates and flatter curves, the effect on the yield curve has been much more pronounced at the short end. The 2-year bond yield has picked up 23 BPS in yield over the past two days, while the 10-year is up about 8 BPS. The yield curve continues to invert, and the spread between the 2-year and the 10-year is now -36 BPS. The amount of tightening that has yet to hit the market is piling up. Luckily, since mortgage rates are more influenced by longer-term rates, we aren’t seeing much of an impact on mortgages (at least not yet). It will be more important to watch what happens in Treasury re-investments. The last time the Fed tried to reduce its Treasury holdings, repo rates spiked, which forced them to suspend roll-offs.

You can’t control revenue as much as you can control expenses.

Lenders have been struggling to set pricing at a premium to offset the cost of origination, due to continuing illiquidity in the higher coupons. Typically a 5.625 note rate would be slotted into a 5 coupon MBS, but currently those are going into the 4.5 because that is where the liquidity is, preventing premium pricing. You can’t control revenue as much as you can control expenses. Most mortgage executives understand how spending on technology can reduce the cost to manufacture.

Contact us and we’ll quantify how much our technology will lower your costs while increasing secondary market profitability, all with a fast and convenient onboarding process.

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.