MBS Weekly Market Commentary Week Ending 4/8/22

Increased market volatility continued this week as the main headline was the Fed mentioning in the Minutes from the March 15/16 FOMC meeting that it plans on a more aggressive approach to the shrinking of its $9 trillion balance sheet than has been done in previous wind-downs. The Fed will decrease its balance sheet starting next month as it stops purchasing MBS and instead lets its assets run off the balance sheet over time. 


As the Fed begins to enact its plan to reduce the size of its MBS holdings, investors are curious to see how quickly the Fed plans to do so. There was agreement indicated in the Minutes of a maximum pace of $95 billion a month ($60 billion for Treasury securities and about $35 billion for Agency MBS) with the caps phased in over a three-month period, or slightly longer if needed. The balance sheet reduction will further tighten credit across the economy as the central bank raises interest rates to cool inflation. 


There was also some agreement that “after balance sheet runoff was well under way, it will be appropriate to consider sales of Agency MBS to enable suitable progress toward a longer-run SOMA portfolio composed primarily of Treasury securities.” With the Fed focused on tamping down inflation, likely inflicting more losses, Treasuries continued their selloff and mortgage rates continued to rise this week.


The highest inflation readings in decades have raised the question of whether the Fed’s dual mandate of 2% inflation and full employment are compatible at the moment. The Fed’s fight to find its neutral state, which neither speeds nor slows growth, is a balancing act it has found challenging to figure out. The economy is generally strong, with low unemployment and decent growth. The Fed suggests it can cool off inflation without driving up unemployment or causing a recession, but such a “soft landing” sounds unlikely in what is expected to be the sharpest tightening in almost three decades.


Chair Powell believes it is possible, but indicated the Fed will prioritize reducing inflation and returning the economy to price stability, which is a major policy shift with unknown implications. Many critics have suggested the Fed has now waited so long to enact stricter monetary policy to respond to inflation that it will inevitably now send the U.S. economy tumbling towards a recession next year. “We do feel that the economy is very strong and well positioned to withstand tighter monetary policy,” said Powell. This recovery has been considerably stronger and faster than in the previous cycle.


He also believes that current global supply-chain problems, which have contributed greatly to the rise in inflation, should eventually recede. Inflation is expected to remain high through the middle of the year before starting to decline. Powell replied that the Fed’s goal was to “better align demand and supply” by nudging down interest-sensitive demand and giving workers more time to return to the labor force after covid. “The plan is to restore price stability while also sustaining a strong labor market,” he said. 


During previous periods of high inflation, central banks have sometimes raised interest rates rapidly, and to such a degree that the demand for goods and services fell to the degree that firms were forced to lay off workers, sending the unemployment rate skyrocketing. With more people competing for each job, downward pressure was exerted on wages and other costs, and it was this brute force that eventually brought down the inflation rate. Since the start of the pandemic, Powell’s Fed has emphasized the need to give the economy time to recover fully


Considering that MBS spreads have widened considerably, concerns persist that the Fed unwind may drain liquidity from the system and trigger higher borrowing costs and spikes in volatility. As a result of this increased volatility, investors have been tightening their rate sheets and policies. Many of the lower note rates have been completely removed depending on the aggregator or agency. Anything 3.25% and below on a 30-year that is still in the open pipeline should be either closed or canceled in the next few weeks. And even if an extension is being charged to the borrower, consider the liquidity of that production.


Looking for actionable recommendations to protect your business and pipeline? Join MCT for an Industry Webinar on April 19th at 11AM PT titled Taper Tantrum Two? Comparing 2013 to 2022 & What Lenders Can Do. In this webinar, MCT’s Phil Rasori, Justin Grant, and Andrew Rhodes will compare 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

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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.