MBS Weekly Market Commentary Week Ending 10/7/22

Rollercoaster Bond Market

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%.

The root cause? Inflation remains elevated. The Fed hopes that inflation expectations don’t become entrenched and thus increase the likelihood that high inflation will persist. History has taught us that price stability is essential to achieving maximum employment over the longer term, meaning that fighting inflation comes before worrying about rising unemployment in the Fed’s eyes. Restoring price stability may take some time and will likely entail a period of below-trend growth, which the Fed is committed to, even if further steps are necessary. The only thing that would cause the Fed to pivot is the banking system coming under stress.

Banking System Stability 

Yes, the Bank of England did intervene in the UK bond market this week, committing to buy £65 billion of long-dated bonds for the sake of stability, which sparked a global rally. A bigger worry than the banking system coming under stress domestically is the potential for a housing downturn, at least with respect to prices. I’m talking about declines in housing markets that saw 30%+ home price appreciation for the last couple years, so a price correction is not unreasonable. Home prices declining in some overheated markets won’t trigger another collapse because banks don’t have much credit exposure to residential real estate lending.

August gross issuance of all agency mortgage bonds came to the lowest level since May 2019 and was the sixth consecutive monthly decline.

There are inevitable comparisons to 2008, but 2008 was a residential real estate bubble and a time when the vast majority of mortgages were not guaranteed by the government. Subprime no longer exists and, aside from non-QM (which resembles Alt-A more than subprime), every MBS is “money good.” Any exposure will be counter-party risk (e.g., those who had warehouse lines with someone like FGMC). So we won’t see a banking crisis, and we won’t see a forced selling of securities. Bottom line, fears about another 2008 are overblown.

Fed Winding Down QE4 at Opportune Time

The Federal Reserve is winding down QE4 at an opportune time. August gross issuance of all agency mortgage bonds came to the lowest level since May 2019 and was the sixth consecutive monthly decline. The $129 billion of supply in August was about 40% of the supply a year ago and just how much low mortgage rates during QE4 wrung the refi towel dry is seen in the conventional and government refinance indices since January 2021, which are down 91% and 89%, respectively. While it is hoped that money managers will fill the demand void left behind by the Federal Reserve and the banks, those are some very large shoes to fill.

The mortgage lending industry needs to get creative. It’s hard to find programs with a few points back, or even a par rate. The dramatic run-up in the price of homes combined with high inflation does give great incentive to financially stressed households to extract equity from their home to tide themselves over. Mortgage lenders have been squeezing all the equity extraction out of homeowners they can in order to keep the lights on. Unfortunately, there’s not a quick fix and it’s going to take some patience in riding out this market cycle. For further reading on the subject, check out our whitepaper from earlier this year, Understanding and Preparing for Changes in the Mortgage Market.

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 10/28/22

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.

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.