MBS Weekly Market Commentary Week Ending 4/22/22

A year ago, you could find a 30-year fixed rate mortgage for under 3%. Today, it is over 5%. The 30-year benchmark mortgage rate primarily reflects two components: the yield on intermediate- to longer-term Treasury securities and a spread that fluctuates over time

The Federal Reserve has held Agency mortgage-backed securities (MBS) on its balance sheet since early 2009 and Fed purchases of these securities have pulled down the yield on the benchmark 30-year MBS by an estimated average of 50 basis points since that time. 

Even though Fed officials have indicated they will allow their MBS holdings to decline in coming months, this will not necessarily cause further upward movement of mortgage rates, as markets are forward-looking. There is a significant amount of near-term monetary policy tightening already priced into the market. To some extent, the recent mortgage spread widening is consistent with markets accounting for smaller Federal Reserve MBS holdings going forward. 

Additionally, Fed MBS purchases in recent years have pulled MBS yields lower than actual mortgage rates, meaning it is reasonable to expect that MBS yields will face more upward pressure than actual mortgage rates as balance sheet runoff progresses. Longer-term, markets appear priced for a fed funds rate that is closer to “neutral.” 

Mortgage rates are separate from Treasury yields, but it is still fair to ask how much higher the yield on the 10-year Treasury note will rise. There is always the potential that yields on U.S. Treasury securities could rise even further, but the recent surge in the 10-year Treasury yield is expected to slow markedly in the coming weeks, which should dampen upward pressure on mortgage rates

There are wide confidence intervals around estimates for both the timing and the magnitude of the impact from balance sheet runoff, and it is unlikely balance sheet runoff has been fully priced in yet. Odds are it is discounted by more than many might suspect, given that the process has not even yet begun. The past several months have shown that the economic outlook and expected path of monetary policy can change rapidly.

History suggests the Fed will struggle to tighten financial conditions enough to cool inflation without causing an economic contraction. While inflation is actually an indication that an economy is growing too rapidly relative to the supply of labor and other resources, the danger is that rapidly rising prices can prompt policymakers to slam the brakes on the economy

The fear is that the Fed has not acted quickly enough to get inflation under control, which now forces it into taking really drastic actions (e.g., large interest-rate hikes) which would go further than merely slowing down the economy, but plunge it into a deep recession, à la the early 1980s. The hope is that the Fed still has a decent chance of cooling down the economy and bringing down inflation without causing a recession, which is known as a “soft landing.”

All that being said, the economic outlook is highly uncertain, and mortgage rates could move higher than expectations to re-establish price stability. With a lot of sharp moves in the market, it helps to have actionable recommendations to protect your business and pipeline. Check out our most recent webinar Taper Tantrum Two? Comparing 2013 to 2022 & What Lenders Can Do. In this webinar, Phil Rasori, Justin Grant, and Andrew Rhodes compared 2013 to 2022 in terms of the deteriorating market, market liquidity in specific coupons, loan sale execution liquidity, and investor pricing performance.

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.