Any potential ending of the government-sponsored enterprise conservatorships will have little effect on mortgage rates and mortgage-backed securities spreads in the near-term, said BTIG analyst Eric Hagen.
Several factors influence mortgage rate movements, including MBS pricing, as well as the 10-year Treasury yield. Based on data from Optimal Blue and Yahoo Finance, the spread between the 10-year yield and the 30-year fixed rate mortgage on Nov. 12 was still abnormally wide at 250 basis points.
Mortgage rates have remained in a range between 6.5% and 6.75%, but the related MBS spreads “are catching some reprieve with interest rate volatility coming down sharply week-to-week,” Hagen wrote in his Nov. 13 Mortgage Finance Roundup.
That was true late last week (Hagen’s capital markets data is as of Nov. 8), but changed on Nov. 12.
In the immediate aftermath of Pres.-elect Trump’s victory on Nov. 5, the 10-year Treasury yield shot up 14 basis points the following day to 4.43%. By Nov. 8 it had given back most of that gain, falling to 4.31.
But on Nov. 12, the next full trading day, the 10-year was back up to 4.43%; at noon the following day, it was at 4.42%.
At the same time, mortgage application volume data released earlier today by the Mortgage Bankers Association found the seven-week streak of lower activity has ended, even though the organization’s rate data reached its highest level since July.
While the election results improve the chances for the Fannie Mae and Freddie Mac conservatorships to end, the immediate impact on mortgage rate activity will be minimal, Hagen said.
“The likelihood improves for the GSEs to get pushed toward a recapitalization and release from conservatorship under Trump’s administration (hence the doubling last week in both the common stock and the preferreds), but over the near term we see mortgage rates and MBS spreads having low sensitivity to the developing conversation surrounding a recap-and-release scenario,” he wrote.
Rate and volume-driven “macro headlines,” and projections for Treasury bond supply remain the near-term drivers for how MBS spreads will move.
A stronger catalyst for spread movement would be the Federal Reserve ending the quantitative tightening program early in 2025, Hagen said.
“Seeing the Fed follow-through with its rate cut last week was supportive for near-term earnings in the non-banks, at the same time we think stock valuations could respond to some spread widening we’re bracing for if expectations for the Fed to cut next year are walked-back even further,” he noted.
Even as expectations for the Federal Open Market Committee remain for another 25-basis-point reduction in short-term rates at its December meeting, future cuts are now uncertain following the election results and a Republican sweep, the November Blue Chip Economic Indicators report from Wolters Kluwer said.
Investors are concerned about the return of inflationary pressures under the likely economic program the new government will look to implement.
The current consensus average for the economists surveyed for the BCEI is for 108 basis points of additional cuts in the Fed Funds Rate during 2025.
“Now, by contrast, the futures market is anticipating only 77 basis points of rate cuts during 2025, with the end-2025 rate-cut expectations having fallen 9 basis points in a single day following the national elections,” Wolters Kluwer said.
Lower jumbo rates during September, before the post-FOMC meeting rise in 10-year Treasury yields helped October’s private-label MBS activity, a Morningstar DBRS report said.
During that month, jumbo rates fell 34 basis points, the Optimal Blue data showed. However, in October and early November, jumbo rates have moved similarly to conforming rates and at one point broke back above 7%.
Approximately $17.6 billion of deals were priced in October, making it the robust month of the year so far for activity, topping September’s $16.3 billion, the rating agency said.
Year-to-date, private-label RMBS pricing volume is over $114 billion, 84% higher than a sluggish 2023. It also tops the $113.4 billion volume in 2022, and that is with two months left in 2024.
