The MCT Review: Market Commentary Week of January 10

What to Watch in 2022

As traders return to action and open 2022, it is to a market dominated by increasing (milder?) COVID infections under the shade of inflation and tightening by the Fed. The last two years have shown that changes in COVID infections shift the economy, though each successive wave of infections has led to milder economic slowdowns. The U.S. finished 2021 with three-decade high inflation and the topic is certainly top of mind for homebuyers, lenders, investors, and our clients. Some say inflation will cool down this year if the global supply chain is able to return to something approximating business as usual. The Fed’s most recent Minutes noted that some of the factors that worked against inflation in the past (e.g., globalization, technology, and productivity growth) may be diminishing. Even with supply chain issues optimistically projected to calm, rising prices of homes are also a worry. 

 

The high demand for housing coupled with low rates over the last two years has seen originators thrive. However, the housing market is shifting into a new era heavily influenced by inflation and lack of supply. Rising prices may delay buying for some if they worry that now is not the right time to make a huge purchase. Others may move faster to find a house because they’re worried home prices and rent prices will increase even more, and they want to lock in a fixed payment. What does it mean for the industry? Demand is strong, but rising mortgage rates would ultimately help quell surging home prices. Housing supply is expected to remain tight due to the wave of millennial first-time buyers, work-from-home individuals looking to buy, and millions of refinance candidates still out there. It would take a considerable decrease in home buyer demand and/or an increase in housing inventory to return things toward a balanced real estate market. The amount of newly listed homes is down 6.6% year-over-year, putting inventory down to 22 days in November 2021 versus 50 days in 2019.  

 

For the mortgage industry, a large focus will be on taking share in a shrinking market. As we see rate and term refinance volume continue to fade (though cash-out refinances remain a good source of business), purchases have the spotlight. Thinner margins and volumes will mean that servicing sales will be very important for many lenders as converting those assets to cash helps to maintain a healthy balance sheet. There is always the looming specter of policy changes, like FHFA announcing targeted increases to Fannie Mae and Freddie Mac’s upfront fees for certain high balance loans and second home loans, that impact front-end pricing. By most accounts, volume will be down this year, and companies will continue to force employees to increase their efficiency and become more efficient themselves. Managers have already cut overtime, increased training and productivity, and stopped replacing employees who are leaving, leaving layoffs as a last resort. There is, of course, optimism on the horizon for 2022. Many indicators depict a healthy economy as we enter the new year, especially if supply chain issues clean themselves up. The labor market is tight with unemployment below 4%, wages are rising, and many households have excess savings accrued over the last two years that will help to cushion the blow against rising prices.

 

Federal Reserve’s Hawkish Pivot

The Fed is expected to raise interest rates approximately three times in 2022, bringing the Federal Funds Rate to just under 1%, and remove stimulus, which will put upward pressure on mortgage rates. After the Minutes to the December FOMC meeting were some of the most hawkish in recent memory, the stage is set for the Fed to fight inflation this year. The Committee has recognized that emergency-level policies are no longer necessary and discussed earlier and faster rate hikes, faster tapering, and balance sheet normalization sooner than previously anticipated. Almost all FOMC members stated that they had revised up their forecasts of inflation for 2022 notably, and many did so for 2023 as well.

 

Fed Chairman Jerome Powell’s appetite for a faster tapering of stimulus is casting him in a role financial markets haven’t seen since he started his tenure in 2018: hawk. Powell’s term has redefined the way the central bank looks at both its employment and inflation mandates, letting inflation accelerate past prior targets in the interest of getting more of the population back to work and at higher-paying jobs. The Treasury bull run over the last couple of years is evidence that markets have enjoyed his dovishness. December 2018 was when Powell’s last big pivot happened, and the dismantling of interest rate hikes made the fourth quarter of that year one of the worst for equities ever. It’s been virtually nothing but encouraging words from the Fed since then against what is now an increasingly bleak picture of inflation.

 

With the inflation target being met and exceeded, the Fed is suggesting a continuing job recovery would mean it’s ready to usher in higher interest rates. Higher rates haven’t always snuffed out bull markets; the pace of tightening makes a big difference, and the Fed must balance tightening before the economy has reached employment goals. The economy is already receiving trillions of dollars worth of fiscal stimulus and negative inflation-adjusted interest rates. More stimulus could be like pushing on a string which would serve to stoke inflation higher. Persistent inflation could place the Fed in the unwanted position of having to react aggressively by raising rates higher than planned and potentially disrupting asset markets.

 

The hope is that the Fed does not have to initiate any real hawkish policies and sees inflation slowing down on its own. High inflation data should keep the Fed focused on gearing its monetary policy toward battling inflation as opposed to battling the impact of the Omicron variant. The Fed has also discussed balance sheet normalization, which would begin after rate liftoff and could be another way to combat inflation. The Fed would like to wind down its balance sheet “sooner” than it did after liftoff during the last policy normalization, which lasted two years. The Fed has indicated its preference is to get rid of MBS from its portfolio first, which will take some time as maturing proceeds are reinvested to maintain the level of holdings before letting them run off. Runoff “caps” are still likely to be appropriate. It does lead to a tightrope act for the Fed: balance annual cost-of-living increases from becoming a permanent part of the labor landscape against the economy returning to the slow growth and low inflation state from the past 20 years.

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.