As the sale of U.S. debt intensifies and the Federal Reserve maintains its tight stance, the spread between MBS and U.S. debt has widened to near the highest level since the financial crisis...
The sale of U.S. government bonds and the tightening signals conveyed by the Federal Reserve are persecuting another victim: the $8 trillion mortgage bond market.
According to a key indicator, in recent weeks, the spread/risk premium of U.S. mortgage-backed securities (MBS) has widened to a historical level, approaching the record set in May this year since the financial crisis.
At this time, the sale that has swept global government bonds has led to long-term borrowing costs in the U.S. and Europe rising to the highest level in more than a decade.
Officials from the European Central Bank and the Federal Reserve have both made it clear that they are unlikely to ease monetary policy soon.
As the yield on the 30-year U.S. Treasury note rose to the highest level since 2007, the average spread between mortgage-backed bonds and U.S. Treasury bonds has continued to expand, causing pain for investors who bought these securities hoping that long-term yields had stabilized.
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Higher mortgage rates may also dampen homebuyers' affordability. Last week, mortgage rates broke through 7.5% for the first time since 2000, and the number of home purchase applications fell to a multi-decade low, indicating a hard hit to the real estate market.
The threat of long-term interest rate increases, concerns about the expansion of government deficits and increased bond supply, and the possibility of a government shutdown have panicked investors, triggering fluctuations in the bond market.
BlackRock CEO Larry Fink said last week that due to geopolitical and supply chain changes making inflation more persistent, he expects the 10-year Treasury yield to reach above 5%.
Oppenheimer & Co.'s MBS strategist Richard Estabrook said, "This (the surge in mortgage rates) is essentially a surrender to the Fed's stance of maintaining long-term high interest rates. People bought mortgage bonds with coupon rates of 2% and 2.5%, expecting interest rates to decline at the end of 2023 and in 2024, but market sentiment has sharply turned against this trade."On Tuesday, the risk premium for mortgage-backed securities was around 1.86 percentage points, compared to the post-financial crisis record of nearly 1.93 percentage points touched at the end of May. This increase was achieved in just a few days.
For investors in mortgage-backed securities, the stance of the Federal Reserve has added pressure to an already weak market.
The surge in interest rates, the Fed's reduction of its bond portfolio, and regional banking crises leading to regulatory authorities needing to sell about $100 billion of such securities have further suppressed demand.
This made these bonds appear "very cheap" earlier this year, prompting new buyers to snap them up.
However, this demand was not enough to bring them back to their previous levels, as one of the largest buyers of mortgage-backed securities - U.S. banks - did not resume large-scale purchases after slowing down in 2022.
Erica Adelberg, an MBS strategist at Bloomberg Intelligence, wrote in a report to clients, "Given the Fed's reiteration of its intention to maintain tight policy until data improves, it is uncertain what will break this downtrend from now until the end of the year."
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