US MBS Market Displays Cautious Optimism Amid Macroeconomic Pressures

Cautious optimism was the dominant feeling at the ABS East event on Monday regarding the US Mortgage-Backed Securities (MBS) market, despite facing macroeconomic challenges. The MBS market, which is the second largest after US Treasuries, has been grappling with issues stemming from rising interest rates and the US Federal Reserve’s exit from the market.

The increase in interest rates has caused bond prices to fall and disrupted the supply-demand balance. As a result, bank treasuries are showing less interest, further reducing demand. However, strategists from Bank of America were united in their view that MBS remains relatively inexpensive.

DoubleLine indicated that banks might return to the market if they stop experiencing deposit losses or if they anticipate cuts in Federal Reserve rates. Nevertheless, supply is projected to stay restricted, as many homeowners are unwilling to accept nearly 8% mortgage rates. This hesitation has led to a notable decline in new MBS issuances.

Baird has forecasted a historic low in net MBS issuance, expecting it to reach only $238 billion this year as a result of these variables. The affordability gap in the housing market is currently at its widest, suggesting that either a 33% drop in home prices or a return to mortgage rates around 3.5% is necessary to restore balance.

This article was generated with the support of AI and reviewed by an editor.