Odd Lots A Broken Market Is Causing Mortgage Rates to Surge
Oct 27, 2022
Guillermo Roditi Dominguez, managing director at New River Investments and a mortgage-backed securities expert, tackles the recent surge in U.S. mortgage rates, now at a two-decade high. He dives into the widening gap between mortgage and Treasury rates, examining its historical context and current market dynamics. Dominguez also illuminates the complexities of mortgage-backed bonds and the challenges homeowners face when refinancing. Additionally, he discusses the pivotal roles of Fannie Mae and Freddie Mac amid significant market shifts.
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Mortgage Rate Spread Mystery
- Mortgage rates significantly exceed treasury yields, currently by around 3%.
- This spread, the highest on record, raises questions about the mechanics of the mortgage market.
Unique Market Dynamics
- The current mortgage market situation is unique because it isn't driven by fear of defaults or falling house prices.
- Instead, it stems from a rapid shift from short-term to long-term mortgage-backed securities (MBS) due to rising rates and other factors.
MBS as Covered Calls
- Mortgage-backed securities (MBS) resemble covered calls, offering limited upside and greater downside risk.
- This makes them less appealing during rising rate environments when bond prices fall.