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 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.