MBS Weekly Market Commentary Week Ending 10/28/22

Agency MBS Liquidity

We still seem to be a ways off from the point an actual FOMC voter says “let’s wait and see” when it comes to hiking rates. Until that occurs, bond prices continue to fall and the Fed (and others) will continue to incur paper losses on massive bond holdings accumulated during pandemic rescue efforts. 

Agency MBS (bonds backed by Fannie and Freddie loans) are commonly the first securities sold in the early stages of market downturns due to their high liquidity. Remember, the agency MBS market is the most liquid fixed income market in the U.S. after Treasuries. The yield that investors demand for these securities are the basic input to determine mortgage rates in general. Bond funds have seen outflows as the prevailing investor sentiment has been to sell what you can now. MBS spreads have widened as a result.

Widening MBS Spreads

The MBS spread is the difference in yield between a 10-year Treasury and corresponding MBS. Because agency MBS have no credit risk (they are guaranteed by the government), the widening is due to overall liquidity and volatility in the bond market. MBS spreads right now are wider than they were at the peak of the financial crisis in December 2008 and wider than they were at the start of the pandemic in 2020 when the MBS market froze and the mortgage REITs were bedeviled by margin calls.

Over the past 10 years, MBS spreads have averaged around 80 BPS, but are hovering around 190 bps recently.

Recently, the hiccup in the UK bond market was a big catalyst for the widening of MBS spreads. Ex-Prime Minister Truss proposed a tax cut plan that sent the country’s financial markets spiraling because investors feared it would drastically worsen inflation. She tried to abandon the plan, but could not undo the political damage that the proposal had done. Who knew that boosting economic growth, the goal of tax cuts, can actually worsen inflation? 

Over the past 10 years, MBS spreads have averaged around 80 BPS, but are hovering around 190 BPS recently. Put another way, that 110 BPS difference means that if the 10-year yield stays the same, there is likely a built-in improvement in mortgage rates of 110 BPS. Yippee! That means we could see rates fall to the low 6% range over the next few months, even if the Fed continues raising rates and the 10-year yield stays put.


Managing Execution in Wider Markets

Can spreads go wider? Yes, however, this is an historically unprecedented market and fortunately these spikes don’t last very long. Currently, every country is facing the dilemma of how to blunt the impact of inflation without making inflation worse. Even as rates continue to rise, from the standpoint of MBS investors, a government-guaranteed 6% rate of return is pretty attractive, especially compared to investment-grade corporate bonds or junk bonds. 

It’s important to manage your execution in wider markets. In Nashville, chatter revolved around both the high coupon TBA markets and the difficulty pricing rate sheets. We’re here to help. Ask your trader for daily high coupon pricing grids and let us manage your TBA orders after you set your price/execution level. Contraction risks in the economy have been raised by tightening financial conditions, persistent inflation, and expectations the Federal Reserve will continue with rate hikes. If the economy does enter a recession, we will see investors sell credit risk and put their money in Treasuries and MBS. It could be sooner than expected. Stay up to date on all the latest news and moves in the mortgage market by joining our newsletter.

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 12/2/22

ederal Reserve Chair Powell tried to walk the tightrope between stressing that the central bank’s inflation fight is far from over and telegraphing that policymakers could downshift from their rapid pace of tightening as soon as the December 13-14 FOMC meeting. The Fed’s publicly preferred measure of inflation, the PCE Core Price Index, which excludes food and energy, was expected to increase 5% year-over-year, but increased 6% (not exactly a downward trend). And the economy added 263,000 jobs in November, which was better than 200,000 estimates as wage inflation continues to increase; average hourly earnings rose 0.6%, faster than in October. 

MBS Weekly Market Commentary Week Ending 11/18/22

As we enter the holiday season, everyone in the mortgage industry has the same problems: lower volume, lower pricing and gain on sale margins. With less emphasis on growing volume, due to a lack of borrower demand from currently high mortgage rates and a lack of seller demand from being locked into low mortgage rates, a much greater focus for companies in the mortgage industry has been on lowering costs and increasing profitability.

MBS Weekly Market Commentary Week Ending 11/4/22

We were reminded this week that the U.S. labor market is still on solid footing, aiding to speculation that the Federal Reserve will continue its aggressive rate hiking path beyond Wednesday’s 75 BPS rate increase. Today, we learned that October payrolls beat expectations (the headline figure came in at 261k, and there was a positive back month revision of 29k), which further complicates Fed’s job and lowers the odds of the mythical “soft landing.”

MBS Weekly Market Commentary Week Ending 10/21/22

We are beginning to see the Fed’s policy moves take hold, with slowing productivity growth, marginal gains in labor force participation, and home builder sentiment continuing to drop as higher interest rate costs price out a large number of prospective buyers.

MBS Weekly Market Commentary Week Ending 10/14/22

The pace of the Fed’s rate hikes and winding down of QE4 have introduced heightened volatility to the bond market. The Fed has raised its benchmark interest rates five times this year, including three consecutive 75 BPS rate hikes, increasing the cost of borrowing money in the hope that more expensive loans will result in less investment, less business expansion, fewer jobs, lower pay, and ultimately less inflation.

MBS Weekly Market Commentary Week Ending 10/7/22

Interesting (read: disheartening) times in this rollercoaster of a bond market, huh? There’s the highest volatility in at least five years, colossal bid-ask spreads, scant liquidity in coupons above par, falling bond prices that have banks sitting on their hands, and a central bank that is still uncertain on how long and hawkish it plans to remain in tightening mode (don’t forget fear of a global recession, escalating geopolitical tensions thanks to Russia’s war on Ukraine, the UK’s tax-cut fiasco, and the potential for further defaults by developing nations). A year ago, 2-year Treasuries yielded 0.2%. They were 1% in January of this year, but today yield more than 4%.