MBS Weekly Market Commentary Week Ending 11/4/22

Labor Market Still on Solid Footing

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.” While the immediate aftermath of the Fed statement saw stocks and bonds rally as there were indications that the Fed was open to the possibility of a pause in rate hikes, the press conference poured cold water on that as Powell said it is “very premature” to be thinking about pausing and that “we have a ways to go on rates.” 

Bond Markets Back in Selling Mood

Investors, in particular, focused on a piece saying that, “In determining the pace of future increases in the target range, the Committee will take into account the cumulative tightening of monetary policy, the lags with which monetary policy affects economic activity and inflation, and economic and financial developments.” That is a change of pace rather than pause or a pivot. Further, Chair Powell began his opening remarks during the press conference by stating, “we still have some ways to go” with rate hikes and that any talk of a pause in rate increases is premature. He emphasized that no decision has been made and it was likely that at the next meeting the FOMC would have a discussion about it.

So, back to selling went the bond markets, as the prevailing sentiment is now that the Fed is far from the point where it can lift its foot off the economic brake and declare victory over inflation. One positive was that Chair Powell did signal that further rate hikes might be smaller. The December Fed Funds futures have a toss-up between 50 BPS and 75 BPS with another 25 BPS to 50 BPS of tightening priced in for the entirety of 2023. If the Fed’s next dot plot in December indicates that the tightening cycle is largely done, we should see a large rally in MBS and corresponding drop in mortgage rates.​

The volatility seen in mortgage rates this year should subside once 1) the peak rate for this hiking cycle comes into view, and 2) inflation begins to slow.

Mortgage rates are based on what MBS investors are willing to pay for these securities. When spreads are large, as they are now, MBS are “cheap” relative to Treasuries. When spreads are narrow, as they were to begin last year, you could say that MBS are “rich.” MBS spreads are wider than the depths of the financial crisis. Bond fund managers constantly swap in and out of different fixed income asset classes to find the best returns, and at some point bond investors will flood into MBS to take advantage of a government-guaranteed rate of return far in excess of Treasuries, which should put some downward pressure on mortgage rates.

Volatility and Associated Problems

The volatility seen in mortgage rates this year as we have progressed up the coupon stack should also subside once 1) the peak rate for this hiking cycle comes into view, and 2) inflation begins to slow. Once inflation is contained, not only should volatility subside, but mortgage rates will start to drift lower. Unfortunately, it may be another year or two until that happens, and the Fed seems firmly in the camp of those who see the job market as too hot. Today’s payrolls report did not help matters.

Keep in mind that the biggest problem facing the economy right now is that prices are rising far too quickly from the lingering effects of the pandemic, which continue to disrupt international supply chains, and the war in Ukraine, which has pushed up the price of food and energy. Inflation is also at least partly the result of excessive demand. Between now and December, we receive additional readings of the consumer price index and the PCE price index. Which path policymakers choose moving forward depends not solely on inflation, but in part on how Fed Chair Powell and his colleagues view the labor market. 

If U.S. companies keep adding jobs and raising pay, inflation will remain stubbornly high and the Fed is likely to remain aggressive. If there are indications of job growth stalling and unemployment rising, the Fed would likely pause sooner to avoid causing a recession. Unfortunately, it would seem we are in what could already be called a “housing recession.” Elevated mortgage rates, combined with steep home-price growth from the past couple of years, have greatly reduced affordability. Home sales have slowed to a crawl and the rise in interest rates over the course of 2022 has hurt the willingness and ability of potential home buyers to enter the market. It’s also hurt potential home sellers who are locked in to low rates and not willing to reduce sales prices materially enough to motivate buyers. Until we have some clarity on how quickly this housing recession spreads to the rest of the economy, MBS spreads and mortgage rates should remain elevated.

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 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.

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%.