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 9/23/22

The phrase “Don’t fight the Fed” was first introduced in the 70’s (a lovely time for inflation lovers) and for most of the last few decades, the phrase meant that the Fed has the market’s back and investors are rewarded for keeping their feet on the gas pedal as the Fed injects liquidity, dampens volatility, and drives outsized returns. But fighting the Fed cuts both ways, and Fed officials are now intent on taming prices, even though the economy is already in a technical recession. Investors have been forced to consider their positions accordingly.

MBS Weekly Market Commentary Week Ending 9/16/22

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.”

MBS Weekly Market Commentary Week Ending 9/9/22

This year’s run up the coupon stack has led to the destruction of both purchase supply and refinance demand, which has drastically reduced prepayment activity. The Fed’s QE4 created a refinance bonanza in 2020 and 2021, but with the Fed leaving the MBS purchase space next week for the foreseeable future, that party is over. The MCT Review this week examines August prepayment speeds that were released yesterday and what to expect for the remainder of the year.

MBS Weekly Market Commentary Week Ending 9/2/22

In addition to raising the overnight Fed funds rate, the Fed is exiting the MBS and security purchase space as it wraps up QE4. The Fed will reduce its asset holdings by not reinvesting the funds received from maturing securities into new securities as it has been doing over the past two years. The MCT Review this week examines the Fed’s plans and the ultimate impact on a volatile bond market.

MBS Weekly Market Commentary Week Ending 8/26/22

This week’s commentary discusses market preparation and reaction to Fed Chairman Powell’s speech in Jackson Hole. As the Fed puts the brakes on the economy, the central bank is willing to let unemployment go up as a trade for getting inflation under control. Rate hikes are expected to continue as the Fed prioritizes driving down inflation rather than economic growth. Read the rest of this week’s market commentary for more information on the Fed and the MBS market.

MBS Weekly Market Commentary Week Ending 8/19/22

Every week the mortgage industry has new headlines. This week saw talk of Wells Fargo scaling back its mortgage division (possibly greatly exaggerated), MBA mortgage applications dropping to a 22-year low, and U.S. retail sales resiliently remaining flat despite a drop in gasoline prices, though the biggest story was Ginnie Mae and FHFA releasing jointly updated seller/servicer requirements.