Background
Worsening conditions in the U.S. mortgage-backed securities market are doing little to ease fears over financial contagion. Demand for home purchases and refinancing continued to take a hit last month, as U.S. mortgage rates increased to their highest levels since November. For many potential buyers, the near-record amount of rental apartments available is becoming increasingly attractive.
MBS current-coupon yield spreads over Treasuries are near the highest level since the 2008 subprime crisis as economic and political concerns weigh on performance, writes Bloomberg Intelligence strategist Erica Adelberg in a BI Chart Book. Mortgage-related exchange-traded funds are seeing outflows, even as overall bond funds enjoy inflows. Applications for loans are near 25-year lows as the housing market languishes. Meanwhile, the U.S. housing market is suffering from a shortage of available properties, including homes that are affordable for buyers who earn an income up to $75,000.
The environment has also created unique opportunities. Dawn Fitzpatrick, chief investment officer of Soros Fund Management, pointed to the valuations of agency MBS. “Two-thirds of your current holders — it’s central banks and banks — have turned into sellers,” she said.
The issue
Nominal current-coupon yield spreads are near decade highs and reaching peak levels from the pandemic panic in March 2020. Option-adjusted spreads are also wide, trading near two standard deviations of the average level, though slightly more in line than nominals, according to Adelberg.
Primary mortgage rates are also approaching historic highs versus Treasuries. Both the secondary mortgage spread to Treasuries and the primary mortgage spread to secondaries have grown wider. That has increased the total spread between 30-year-fixed consumer mortgage rates and 10-year Treasuries to levels closely approaching those of the financial crisis. Elevated spreads could make it harder for borrowers to find rate relief even if Treasuries rally and secondary mortgage spreads tighten, Adelberg wrote.
Activity in the existing-home market continues to wane. Single-family existing-home sales in April fell 3.5% month-over-month and are down more than 20% from a year ago. Existing-home median prices continued to decline as well, seeing their largest year-over-year drop since early 2012, though this may partly reflect the mix of homes purchased. Resale activity is slow in part because many homeowners are locked into low-rate mortgages while the existing home market is suffering from a shortage of available properties. MBS spreads may remain under pressure until the economic and inflation outlooks become more optimistic, Adelberg wrote.
Tracking
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