MBS Weekly Market Commentary Week Ending 3/18/22

This week was all about the Fed. Let’s look at the effect of quantitative easing on MBS spreads, updated economic projections from the FOMC, and how President Biden’s nominee, Sarah Bloom Raskin, is going to have a difficult time winning approval in Washington D.C.


As expected, the Federal Reserve raised interest rates this week for the first time since 2018. MBS and Treasuries were sold off in the aftermath of the announcement. One point of note is that the Federal Reserve’s unwinding of its bond buying program has been having a stronger impact on mortgage rates than Treasury yields.


The Fed’s re-introduction of quantitative easing (QE) back in 2020 in response to Covid pushed MBS spreads, or the difference between the yield on mortgage backed securities and Treasuries, down. Spreads had peaked at the onset of the pandemic during the period of margin calls and the Fed’s purchases of MBS helped mask some of the effect of increasing volatility in the bond market. 


Now that QE is over, MBS spreads are returning to normal, albeit wider than normal. During QE, long-term rates had a very low signal-to-noise ratio. The reduction in purchases of Treasuries and MBS has made the shape of the yield curve (the difference between longer-term rates and shorter term rates) once again transmit useful information. 


Mortgage rates have been rising easily when the 10-year yield increases. They are moving down stubbornly, if at all, when the 10-year yield falls. It is important to remember that this only represents what MBS investors are willing to pay for generic mortgage backed securities and doesn’t take into account competitive activity between mortgage bankers. 


When it came to the actual FOMC meeting, statement, “dot plot,” and press conference this week, the consensus is now that the Fed Funds rate will be between 1.75% and 2.25% by the end of the year. The Fed expects to have rates above the long-term expected rate for 2023 and 2024, though much of this will be determined by the path of inflation.


Economic forecasts were adjusted, with the 2022 GDP growth forecast cut to 2.8% from 4% and the inflation rate increased to 4.3% from 2.6% in December. The press conference contained no surprises, though Fed Chair Powell said the uncertain effects of the war in Ukraine were likely to push up inflation while slowing economic growth. 


It remains to be seen what will happen to prices when the Fed begins to unload its holdings of MBS. Even with refinance volume drying up, making for less supply from mortgage banks, Fed has a lot of paper that needs to go.


In Washington D.C., Sarah Bloom Raskin, Biden’s nominee, had a blow dealt to her nomination after West Virginia Senator Joe Manchin expressed opposition to her nomination. Manchin’s issue with Raskin is that she wanted the Fed to take climate into account in banking regulation which would restrict credit to the energy industry. His concern is that the Fed could decide that excessive energy exposure would cause a bank to flunk its stress test, which would then limit dividends and buybacks. Without Manchin’s support, she will need a Republican to vote for her, an unlikely scenario.

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.