Another Day In Bidenville! Mortgage Indicators Ring Alarms as Spreads at Post-Subprime High

A Biden Saturday Night!

Worsening conditions in the US mortgage-backed securities market are doing little to ease fears over financial contagion as a recession looms.

MBS current-coupon yield spreads over Treasuries are near the highest level since 2008 subprime crisis, as economic and political concerns weigh on performance, Erica Adelberg, a Bloomberg Intelligence strategist, wrote in a BI Chart Book. Mortgage-related exchange traded funds are seeing outflows, even as bond funds as a whole enjoy inflows. Applications for loans are near 25-year lows as the housing market languishes.

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The top panel shows nominal current-coupon yield spreads are back near decade highs, surpassing those seen in the fourth quarter and reaching peak levels from the pandemic panic in March 2020. The bottom panel shows option-adjusted spreads are also wide, trading near two standard deviations of the average level, though slightly more in line than nominals, Adelberg wrote.

Primary mortgage rates are approaching historic highs versus Treasuries too.

Both the secondary mortgage spread to Treasuries (white) and the primary mortgage spread to secondaries (blue) have blown wider. That has increased the total spread between 30-year-fixed consumer mortgage rates and 10-year Treasuries (pink) to near financial-crisis levels. 

Elevated spreads could make it harder for borrowers to find rate relief, even if Treasuries rally and secondary mortgage spreads tighten, Adelberg wrote.

Mortgage ETFs saw marginal outflows while bond funds as a whole continued to see inflows. To monitor ETF flows:

Flows into US aggregate bond ETFs are mostly positive this year, as investor demand has improved on higher yields. Agency MBS-specific ETF flows, however, are more muted, Adelberg wrote.

Loan applications remain near all-time lows, showing no signs of life yet.

Loan applications for refinancings and purchases are near 25-year lows as housing-market activity is still depressed, and most refinancings are uneconomical at current rates, Adelberg wrote. The 30-year fixed mortgage contract rate hovers around 6.7%.

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. Low existing homes for sale, with many homeowners locked into low-rate mortgages, are depressing resale activity.

MBS spreads may remain under pressure until the economic and inflation outlooks become more optimistic, Adelberg wrote on May 31.