MBS Weekly Market Commentary Week Ending 6/3/22

Let’s take a little assessment of where we sit as a mortgage industry heading into summer. There is always headline news that drives markets – remember Brexit and the U.S. – China trade deal dominating headlines over the past couple years? The main concern currently for the U.S. economy, and thus mortgage originators, investors, and those involved with all aspects of the mortgage loan process, is how the Fed will bring down inflation while maintaining a strong economy. The Fed has a commitment to fulfilling its dual mandate of price stability and maximum employment, but with inflation beginning to have big implications on the entire financial system and Fed Chair Powell saying “maximum employment has been achieved,” the Fed is much more concerned with returning inflation toward its longer-run goal of two percent. The outlook hasn’t been great for originators, with staff reductions beginning across many companies. Let’s look at volatility, uncertainty, and how that has contributed to where we are today.

Volatility over the last several months in the bond market has been driven primarily by worries about the Fed’s quantitative tightening, or the reversal of its bond buying program. Fears have caused the TBA market to trade at extremely wide bid-ask spreads. We are in a bit of unchartered territory, as the last time the Fed tried quantitative tightening it caused major disruptions in the money market. And that was in an environment of benign inflation, which should have made reversing its policy easier. This week wrapped up “Fed speak” as we enter the black out period before the June 15 meeting. There have been no major economic surprises, and the economy continues to hum along, adding 390,000 jobs in May, which was more than expected. A 50 basis point hike is expected at the next two FOMC meetings. 

Bond market volatility seems to be calming down, which will naturally pull MBS yields closer to Treasury yields. Why? Because borrowers have the option to prepay their mortgage early, MBS investors are “short” that option. The value of that option increases as volatility increases, which increases the difference between the yield on Treasuries and MBS. MBS have been unpopular this year ahead of the Fed’s plan to increase rates and sell some of its portfolio, but are becoming a more attractive alternative to other asset classes seen as safe, such as U.S. Treasuries and investment-grade corporate bonds. There is talk that we might have already seen the highs of the year in mortgage rates, and declining volatility will help mortgage rates lower and give borrowers and originators a much needed boost.

The additional yield required by MBS investors has risen versus the beginning of the year. Couple that with declining origination volume, because high rates dissuade refinance (and some purchase) candidates and home prices having risen about 20% nationwide over the last year, and it has been a tough time for the industry. Purchasing power for borrowers has decreased during a time of record home prices and there are struggles with supply and affordability. Inflation, weaker economic growth, and reduced consumer spending all portend some headwinds. If I had to provide you a silver lining? A poor year for the mortgage industry is never a certainty – if you can remember, Q1 was bad last year before a rocketship of originations in summer created $4.5 trillion of origination volume by the end of the year.

How about another silver lining? MCT is happy to provide you resources to help weather the current market, client or not. Check out our whitepaper with MBA’s Chief Economist Mike Fratantoni from earlier this year: Understanding and Preparing for Changes in the Mortgage Market. View our recent webinar: Improving Profitability to Counter Market Headwinds. Or contact us to see how we can help with mandatory loan sales, investor set optimization, bid tape AOT, an open loan exchange, and digitizing the TBA trading process. That’s all for this week.

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.