This is Matt Graham with the MBS Live Market update last week ended with bond yields at or near their lowest levels of 2025 and their lowest levels going all the way back to December 18th or the morning of December 18th before the big fed dot plot revelation and the fed announcement and there were several factors driving the gains it began on Wednesday with the fed oddly enough This time it was not a Fed announcement, but rather the minutes from the most recent Fed meeting. That is a more detailed recap of the meeting that took place three weeks ago and there was a bit of an interesting revelation depending on whom you ask and it had to do with quantitative tightening. That’s the process by which the Fed allows their bond holdings to quote unquote, roll off the balance sheet. Alternative to that is to reinvest the proceeds of those bond holdings. And by reinvesting the fed would be buying bonds and keeping the balance sheet at the same level, but they’re trying to shrink the balance sheet. And that is the quantitative tightening piece. And it contributes to overall tightening and helps get the balance sheet back down to levels that they want it to be at, and potentially adds a little bit of a tightening impulse to monetary policy. In the minutes, they mentioned the possibility of pausing quantitative tightening, i.e. resuming reinvestment into the bond market. In this case, it would be just into treasuries, by the way, because MBS are not getting as much love these days when it comes to the Fed’s SOMA portfolio, the open market account, and any proceeds that come into MBS would be reinvested to treasuries. Why are they talking about pausing? The quantitative tightening at first, the market surmised and the minute stated that it had to do with liquidity and reserve levels surrounding the debt ceiling resolution or potential debt ceiling resolution and the emergency measures that treasury needs to take to fund the government and the fluctuations in reserves in the treasury general account. But the next day, a fed speaker. It said that it’s not only that, but the Fed is also getting close to potentially leveling off the balance sheet. Either way, the market took that as a moderate buying cue on Wednesday afternoon and it helped reverse the momentum that had been in place so far that week, which had been slightly negative and got buying underway. The next day was very flat Thursday, but the following day on Friday, things took a turn for the better for the bond market. And that largely had to do with S&P globals PMI for the services sector, it came in at 49.7 versus 53 forecast and 52.9 previously, it was the lowest reading since 2023. The price component also fell by a combination of the low outright number being under 50 is technically considered contractionary and the huge miss from forecasts. It makes traders trade ahead of time, the ISM services, which will come out next week. And that is the bigger ticket when it comes to the PMI. Data points PMI stands for purchasing managers index and it is like a little mini GDP that’s more timely and generally much more traded by the bond market of the two types of PMIs between manufacturing and services. It is the services PMI that tends to have a much bigger impact on financial markets. S&P is separate from ISM. These are two providers of PMI data and S&P is very popular worldwide, but ISM has always been dominant in the US on these occasions where S&P indicates that ISM might deviate greatly from expectations, it can have just as big of an impact. So that means that ISM services will need to corroborate that. Otherwise we could see a little bit of a bounce back next week. In addition to PMI, much was made by some of the consumer sentiment data. On Friday morning, which came out at 10 AM and although it was indeed weaker than expected, it was definitely not a material market mover. If one zooms in on the market movement at 9:45 AM. When the PMI data came out and 10 AM when the consumer sentiment data came out, it’s very clear where the movement is. The only other material impact during the week came overnight on Thursday morning when Treasury Secretary Besant said he was not in a hurry to quote unquote term out the treasury issuance. That means that he’s not expecting to move the debt issuance landscape toward longer durations, which is something he had previously said will likely happen eventually. So for now, if that treasury issuance is staying focused on the short term, it is Better all things being equal for longer term rates, like 10 year yields, five year yields, 30 year yields, and mortgages looking ahead to the current week. We’re starting out on fine footing with bonds gaining modestly. The stock market seems to be a factor over the past few sessions as stock losses have fueled some safe haven buying in the bond market. There are treasury auctions this week. They’re on an earlier, the normal cycle starting today, as opposed to tomorrow. They typically start on Tuesdays. That will be wrapped up by Wednesday, and then we’ll have economic data and month end trading heading into Friday, which is the last day of the month. The only big ticket economic report is the PCE price index on Friday, and that’s the inflation report that traders had in mind after buying bonds in response to PPI data last week. Recall that the producer price index suggested that PCE inflation would be lower than expected. So we need to see that confirmed on Friday. Otherwise bonds are at risk of bouncing back up toward higher yields. But if it is confirmed, we seem to be holding under 4. 5 percent in 10 year treasury yields and trading at the best levels of the year. Again, both for treasuries and MBS, that’s going to do it for this week. Back to you.
Matt Graham, Founder and CEO, MBS Live
Matt began as an originator in 2002. He fell in love with the idea of following MBS in real-time but felt that existing products were only scratching the surface. Thus was born MBS Live in 2007, the first-of-its-kind platform with real-time market data/analysis, and live chat with analysts, traders, and originators around the country. He is currently the Founder and CEO of MBSLive!
He’s been covering bond/mortgage markets, writing commentary, alerts, and chatting with the live community every business hour of every business day ever since.
Matt also serves as the Chief of Operations for mortgagenewsdaily.com, where he is one of the industry’s most respected mortgage rate experts, frequently quoted in the media. Mortgage News Daily’s rate index is used as the definitive resource on day-to-day mortgage rate averages.
He lives in the Pacific Northwest with his wife and son where he enjoys skiing, fishing, coaching youth sports, playing the guitar, and more DIY projects/hobbies than he’d care to admit.