MBS Weekly Market Commentary Week Ending 7/8/22

Let’s take a minute to look at some silver linings in the mortgage market. The last couple of months have been a volatile (read: unpleasant) time for the industry, with market sentiment torn between pushing yields higher due to Fed rate hikes and falling yields caused by recessionary fears. Originators have seen volumes drop and margins contract, leading to downsizing. We are nearing the cusp of “bad news is good news,” where economic weakness is interpreted as good news for medium-term economic growth because it means the Fed may ease up on the brakes. 

The FOMC minutes from the June 14/15 meeting showed that the Fed is worried most about inflationary expectations becoming entrenched in the economy and the central bank indicated a willingness to cause a recession to defeat inflation. The 2s-10s spread inverted this week, historically an early warning sign of a recession. The biggest mistake, in the Fed’s opinion, would be to fail to restore price stability. The problem for the Fed is that interest rates are still highly negative on an inflation-adjusted basis. So, even though the Fed is being aggressive in hiking rates, overall monetary policy remains highly accommodative.

A primary concern for the MBS market in the second half this year will be the additional net supply thrown onto the market by the Federal Reserve’s change in monetary policy. Expectations are for between $150 and $180 billion in total runoff from the Fed’s balance sheet to hit the market by year’s end, combined with the conspicuous absence of the Desk’s daily MBS purchase operations. Current expectations are for another 75 BPS at the July FOMC meeting, 50 BPS in September, then 25 BPS in November and December. That is still a lot of tightening to go, and since the Fed Funds rate tends to impact the economy with a roughly nine-month lag, we haven’t even begun to feel the impact of the rate hikes we have already seen.

Forgetting the Fed Funds rate for a moment and looking at MBS, the absence of quantitative easing does not necessarily connote “quantitative tightening,” at least until the Fed begins to actively sell MBS. Yes, there is balance sheet runoff from early payoffs, but some of that is being reinvested in MBS and the minutes from the June 14/15 FOMC meeting made no mention of MBS sales. As has been broadly discussed, the Fed is attempting turn down the heat on demand (and the broader consumer economy) without causing undue hardship for firms that rely on mortgage finance.

The drop of mortgage refinancing activity due to higher rates and receding from the en fuego purchase market from the last two years will help ease the flooding of MBS supply. The type of bonds created via refinancing (the 10-year, 15-year and 20-year variety) have predictably dropped a larger percentage than aggregate gross issuance for agency mortgage bonds. Agency mortgage bonds have the advantage over investment-grade corporate bonds of having no credit risk, which in an uncertain economic environment grants it a significant advantage.

Given where rates have headed, many lenders have been exploring new product offerings, including ARMs. We have seen some questions surrounding pricing. Fortunately, issuance is picking up and July is shaping up to be a solid month based upon forward sales. For any secondary marketing concerns or questions you may have, feel free to contact us or reach out to your MCT trader.

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.