Whereas an investor knows the rate of return on something like a Treasury note, MBS require a bit of guesswork because borrowers can opt to sell or refi, etc. That makes MBS yields a moving target, but there are mathematical models that calculate them. Those models are unhappy right now. One issue is the inverted yield curve (shorter-term debt is underperforming in general, and mortgages are widely assumed to be much MUCH shorter than their typical Treasury benchmarks). The other is volatility (all other things being equal, volatility hurts MBS spreads). Even if we use a 5/10yr Treasury blend as a benchmark, MBS yield models suggest the widest spreads in nearly a decade.
That spread can be seen in the blue line at the bottom of the chart. Other sections are included for “fun.” They show the unsurprisingly steeper path for mortgage rates in 2022 after almost 2 years of outperformance. But rates aren’t exactly the same as MBS yield in terms of movement. The next two sections show that. Specifically, the red line (gap between rates and MBS) is volatile but flat whereas the orange line (gap between rates and 10yr) is rising. This suggests mortgage lenders hands are fairly well tied and rates are being forced higher by MBS.
Shifting gears to the broader bond market, today can do little or nothing to meaningfully impact the bigger picture. Rates have risen to match super long term highs ahead of next week’s Fed announcement and that’s that. Any volatility in this territory is just insignificant noise until after next Wednesday.
Read More: MBS Spreads Are Not Happy