MBS Weekly Market Commentary Week Ending 8/5/22

The primary driver of movement in the bond market this week was always going to be the July employment situation report, which came out this morning and showed that the U.S. economy added 528,000 jobs over the past month. Expectations were for the economy to have added 230,000 jobs after adding 372,000 in June. This is the highest monthly jobs gained in five months and the unemployment rate ticked down to 3.5%. The report has large implications for the near-term path of Fed rate hikes and MBS pricing. The recent rally in the bond market was due to investor hope that the Fed would be less aggressive going forward. That will not be the case.

The labor market is still strengthening, not weakening, which is consistent with an economy in expansion during an inflationary boom. Talk of a recession is premature. The report, which is the latest chance to gauge the strength of the U.S. economy, makes the Fed’s job harder, as a booming labor market will likely force the Fed to raise rates by 75 BPS for the third consecutive time at its next meeting in September. Wage growth, which climbed 0.5% for the month (picking up from 0.3% in June) and 5.2% over the last year feeds into the narrative that we are yet to reach peak inflation.

The strong payrolls report validates the Fed’s view of a resilient economy that can withstand additional rate hikes. Bond yields had been falling on the hope that the Fed will pivot to a more normal policy as the economy weakens, but the report endorses much of this week’s Fedspeak that sought to jawbone rate expectations. A handful of Fed officials this week reiterated the central bank’s resolve to bring down high prices; St. Louis Fed President Bullard said that the central bank will continue raising rates until it sees compelling evidence that inflation is falling. He added that he expects roughly another 1.5 percentage points of interest rate increases this year. Minneapolis Fed President Kashkari said that the central bank is committed to doing what is necessary to bring down demand to reach policymakers’ 2% long-term inflation goal, which remains far off.

This payroll report shows that Fed has a lot more work to do in getting aggressive and pushing up rates, which makes the “soft landing” scenario seem less likely. Expectations for Fed policy have already been recalibrated, with a hike of 0.75%  the most likely scenario at the September meeting as the central bank fights inflation. Treasury prices sank in the wake of the report. There will be one more jobs report released before the September FOMC meeting, but this report confirms the need for the Fed to continue tightening, and Fed officials have come out in favor of front-loading rate hikes during this tightening cycle.

While the possibility of a dovish pivot that Fed Chair Jerome Powell hinted at last week has diminished, volatility persists in the bond market. 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 published several blogs over the last few weeks, including Strategies for Mitigating Risk in a Volatile Market, which provide more subject matter on the current market. As always, contact us if you are looking for a better suite of secondary marketing products or more guidance on how to manage market volatility.

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 7/22/22

PMI was much weaker than expected with services dropping the most while manufacturing held relatively steady as private sector output contracted for the first time in over two years amid muted client demand. The downturn in output signaled a further loss of momentum across the economy of a degree not seen outside of COVID-19 lockdowns since 2009. The recession talks will be a major focus now.

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MBS Weekly Market Commentary Week Ending 7/15/22

The steady, but lighter TBA supply continued with pricing trending lower, gaining back some ground. Fed comments have helped the short end of the curve recover significantly, and better rate sheets should start hitting the screens. Ginnie Mae issuance remains at a better pace, but the late May/early June sell-off that produced a lock flush is adding to more production. Agency production, especially Ginnie Mae, shouldn’t drop off as much as the general population.

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MBS Weekly Market Commentary Week Ending 7/8/22

We saw steady TBA hedge volumes throughout the week with the heavy day on Wednesday. Purchase activity remains busy and some refinance activity is still present in the wake of the move lower. FNCL 5.0s have been in a tight range and reprices have dropped off. Payroll data has caused more volume to hit the market, but also more servicing selling as lenders adjust their hedges with a move into higher rates.

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MBS Weekly Market Commentary Week Ending 7/1/22

Steady day-over-day TBA hedge flows have included a lot of pair offs as lenders lifted their hedges with the commitment of month-end whole loan sales. FNCL 5.0s have exhibited price appreciation, gaining versus previous closing levels. TBA markets moving higher has driven rate sheet improvement and TBA hedge flows will be much lighter due to the Independence Day holiday. Ginnie Mae issuance for June has closed and reflected slight month-over-month drop.

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MBS Weekly Market Commentary Week Ending 6/24/22

Hedge supply has settled a bit after price movement was relatively contained with FNCL 5.0s moving within a tight range. Less intraday reprices are occuring and steady supply should continue. Be aware of pool submission cutoffs. Ginnie Mae issuance is pretty much closed for the month and it looks like we’ll end lighter versus May, though there will be some that residual will trickle in from custom issuance.

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MBS Weekly Market Commentary Week Ending 6/10/22

We have seen steady day-over-day TBA hedge supply, but some volatility after the ECB announcement. There have been intraday reprices throughout the week as mortgages moved wider and tighter. Rolls closed lower with lighter bank flows not enough to offset real money selling. Spec origination has been busy, highlighted by Class B and G2 custom lists. 15-year pools traded just a touch behind last month’s levels, performing better than 30-years, as investors remain focused on shorter paper. Customer interest is muted ahead of the FOMC next week. Custom pools traded fairly well, mostly holding up to recent clearing levels.

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