MBS Weekly Market Commentary Week Ending 7/1/22

Is there more widening ahead for mortgages? The Fannie Mae 30-year current coupon spread went from +180 BPS in March 2020 to +60 BPS in April 2021, and now sits around +130 BPS. A lot of the widening potential depends on the Fed’s balance sheet, which now totals about $2.7 trillion of agency MBS. The coupons the Fed holds the most of are those that were produced over the past two years: G2SF 2% and 2.5%, UMBS30 2% and 2.5%, and the UMBS15 1.5% and 2%.

After flooding the housing sector with deluge of cheap credit since March 2020, the U.S. central bank is now looking to stem the tide. Daily Fed purchases of agency MBS are now well under $1 billion a day on the latest purchase schedule, a far cry from the record $41 billion purchased on March 27, 2020, and $36.6 billion daily average that month when the central bank ramped up QE4. 2021 saw the central bank take down an average of $5.3 billion per day in agency MBS. The 30-day trailing average of daily purchases is now at $1.3 billion, down from its high of $19 billion seen in April 2020.

The New York Fed’s latest agency mortgage bond purchase schedule takes us one step closer to the central bank allowing mortgages to simply roll off its holdings. Prepayment speeds have gone from a torrent to a trickle as most American homeowners have no refinance incentive. As a result, the runoff from the Fed’s balance sheet is not likely to hit the $35 billion per month cap that will come into effect in September – it is likely to be about $25 billion in roll off per month over the near term – meaning the roll off from the Fed’s balance sheet over the second half of this year should add another $150 to $180 billion in mortgage bond supply.

While any Fed sales of mortgages likely won’t occur until 2023, at the earliest, should the central bank engage in active selling (and that remains undetermined), those coupons mentioned in the opening paragraph are likely to see the most spread widening as a result. This will be the Fed’s third attempt to get back to an all-Treasury balance sheet and another question is how eager will money managers be to take down supply at these spreads? The recent elevated volatility has kept banks on the sidelines.

The FNMA 30-year current coupon spread over the blend of 5-year and 10-year Treasury yields is currently over two standard deviations above its trailing half-decade average. Volatility has re-entered the picture. The problem with inflation remains and slowing money supply growth will further dampen the securities market. More Fed rate hikes are coming through year-end. Year-end forecasts for the Federal Reserve rate hikes increased to 3.50% from 2.75% one month earlier.

While it is a tough time for the mortgage industry, did you really think QE4 was going to end any differently? It was always unlikely that the Fed could pour over $3 trillion of buying power into the mortgage sector and then turn off the spigot without markets reacting adversely. Now that the Fed has removed the training wheels off agency MBS, liquidity needs to develop in higher coupons so that we have better par rates, which will ease pricing issues. Lenders also must focus on cost reduction. 

Caution is warranted. Looking for more tips on how to navigate this period of increased volatility? Hopefully you attended our webinar on Improving Profitability to Counter Market Headwinds. We have also had several client-specific webinars over the last few weeks. Contact us if you are looking for a better suite of secondary marketing products or more guidance on how to manage market volatility.

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.

 Join Newsletter or Follow MCT on Social Media:

Previous Weekly Market Reviews by Mortgage Capital Trading (MCT)

Sign up for daily mbs market commentary and review previous commentaries by visiting our commentary category page. Join our email list for further MBS market news, subscribe to receive educational articles, whitepapers, relevant updates, and mortgage market commentary. 

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.