Apr 6, 2023 - Economy

One sign of investor pullback in the mortgage market

Source: BTIG calculations; 30-year fixed-rate current coupon vs. 5-year/10-year Treasuries; Chart: Axios Visuals

The gap between mortgage rates and the Treasuries they’re benchmarked to has widened since the collapse of Silicon Valley Bank last month.

Why it matters: It’s one sign of the investor retreat in the market for mortgage-backed securities — and ultimately, it leads to higher financing costs for American homebuyers.

  • Mortgages underpin the so-called American dream — and mortgage-backed securities are now a $12 trillion market that touches much of the U.S. financial system.

The background: As interest rates rose rapidly over the last year, mortgage investors of all sorts saw losses in their portfolios. That's because as rates on newer mortgages go up, the value of older, lower-rate deals goes down. (This is what happened to Silicon Valley Bank, leading to its collapse.)

  • If holders of mortgage bonds need to sell them to, say, cover cash outflows or meet margin calls, the selling activity can depress the prices (pushing up yields) even further.
  • New mortgages, in turn, need to be competitive with secondary market yields in order to draw investor interest. And so the cycle continues.

Between the lines: Treasury yields have gone down since the start of the banking crisis that SVB's failure spawned — something of a classic flight to quality mixed with bets that the Fed will need to stop raising rates soon because, you know, banking crisis.

  • But with mortgage spreads going up, much of the decline in the benchmark rate doesn't make its way to consumers taking out new home loans.
  • For example, the 10-year Treasury declined about 0.7 percentage points over the last month, while the average 30-year mortgage, per Freddie Mac, declined by just 0.4 percentage points.

The bottom line: "It's not surprising that mortgage spreads would widen in response to everything that's going on," says Eric Hagen, mortgage and specialty finance analyst at BTIG.

  • And given the uncertainty in the banking sector — and potential lending pullback — spreads are less likely to head back down soon, he adds.
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