Over the last three weeks, withdrawals from U.S. mortgage-bond funds reached a speed that ranks in the top seven since 2021 began. The retreat followed a jump in Treasury yields to levels not seen in decades, a move fueled by rising oil prices, worries about inflation, and the prospect of further Federal Reserve rate hikes. In September, the Bloomberg US Mortgage Backed Securities Index delivered its second-worst month on record.
Mortgage-backed securities react sharply to quick moves in interest rates because bond yields help set borrowing costs across the economy. September's selloff in Treasuries pushed long-maturity yields to 24-year highs. As interest rates climb, homeowners usually halt refinancing, extending the life of lower-coupon mortgages for investors beyond what they anticipated.
Fund outflows are the clearest signal of what investors actually believe. Market Briefs covers fixed income free every weekday.
"Fed policy tightening and a flatter curve may reduce demand from banks, a key source of MBS demand," wrote Erica Adelberg of Bloomberg Intelligence, who serves as senior MBS strategist.
Rate shocks can turn the screws on mortgage-bond performance fast, which helps explain the recent bumpiness in funds tied to this market. If you are seeing choppier returns, this is the backdrop: higher Treasury yields, slower refinancings, and pressure on a rate-sensitive corner of fixed income.
When rates jump, mortgage bonds are usually first to be sold. Join Market Briefs free and follow the flows.
