MBS Weekly Market Commentary Week Ending 4/1/22

As the first quarter of 2022 ended, volatility persisted in the bond market. Let’s take a look at what a flattening yield curve means and how the Fed plans to engineer a “soft landing.”


Estimates have the Federal Reserve’s nearly $3 trillion of MBS purchases since the onset of the pandemic lowering mortgage rates by 40-basis points, meaning the worst global bond rout of the modern era continued as we enter April with markets pricing in tighter monetary policy by the Fed. The first quarter of 2022 has officially ended, though we have already recorded the worst year for bonds since 1973.


The yield curve has been flattening (or, in some cases, inverting) as investors bet the Fed will tighten policy rapidly enough to risk a sustained slowdown in growth. Five-year Treasury yields rose above those on 30-year bonds this week to invert for the first time since 2006 (the spread between five-year and 10-year Treasuries inverted late last month) as shorter maturities have been selling off faster than their longer-dated peers.


As investors re-calibrate expectations for further rate hikes this year, with fed funds futures now predicting a fed funds rate between 2.5% and 2.75% by the end of the year, chatter is that the Fed may inevitably cause a recession if it gets serious about taming inflation. Data is mixed on tightenings and recessions, but the yield curve inverting is a strong recessionary indicator. Not all yield curve inversions are fatal, but rather a sign that the recent distortions are unsustainable.


The question is not whether the Fed is about to embark on a tremendous amount of tightening, but whether or not the economy is strong enough to take it. A strong labor market (Non-farm Payrolls in March were +431k while the unemployment rate came in at 3.6%) means both that the economy is at or near full employment and also that wage-based inflation pressures might dictate the Fed can take an even more aggressive approach in removing its policy accommodation. Rising wages create shortages and that causes prices to rise. While the Fed hopes supply chain issues work itself out, there seems little to cause the tight labor market to reverse course. 


A flat yield curve means a few things for mortgages, the first being that shorter duration mortgages should underperform relative to longer duration mortgages. Yet to really materialize, but something to keep an eye on: a compression on new ARM offerings relative to 15-year and 30-year fixed mortgage rates. That said, largely driven by the bank backing of these products, ARMs have been slower to move relative to the recent uptick in rates.


As bonds sell off, mortgage rates have moved inexorably higher. MBS spreads widened into the end of the quarter, meaning that mortgage rates are rising faster than Treasury rates. Much of this is based on fears that the Fed will start selling its portfolio of MBS. We aren’t quite there yet, but the market does its best to price in future expectations.


For those wondering why the Fed is still purchasing MBS despite announcing it was done, the recent Fed purchases of MBS are a reinvestment by the Fed of principal repayments and are not part of the quantitative easing, which has wound down. There should continue to be some reinvestment purchases of MBS as the Fed manages its balance sheet and makes sure that the market transitions smoothly to the Fed being much less of a market participant.


At the most recent Federal Open Market Committee meeting (the FOMC is the Fed’s main policy making body), the Fed indicated it will begin reducing its balance sheet through traditional means. This is separate from the tapering of purchasing treasuries and MBS, which ended last month. The plan will ultimately be shared at the next FOMC meeting in four weeks, but the expectation is that the Fed will not actively sell mortgages as some had feared based on previous remarks.


We are monitoring the market situation closely and will keep you informed of potential impacts to your business and pipeline.

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

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MBS Weekly Market Commentary Week Ending 10/21/22

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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.