Fed rate hike expectations hit the mortgage-backed securities market, bank demand may further weaken.

BlockBeats news, October 12th - Over the past three weeks, investors have been withdrawing from US mortgage-backed bond funds at a historically rare pace, with the scale of outflows ranking among the seven worst since early 2021. As interest rates soar, investors are seeking to avoid market volatility risks. The US mortgage-backed securities index recorded its second-worst monthly performance on record in September.

Previously, US Treasury yields rose to multi-decade highs driven by soaring oil prices, heightened inflation concerns, and market expectations of Federal Reserve rate hikes, triggering a sell-off in mortgage bonds. Mortgage-backed securities (MBS) are highly sensitive to sudden fluctuations in bond yields, as bond yields serve as the pricing benchmark for borrowing costs across the entire economic system. When interest rates rise, homeowners typically stop refinancing their housing loans, causing investors to hold low-yield securities longer than previously expected.

Strategist Erica Adelberg wrote: "The Federal Reserve's tightening of monetary policy and the flattening of the yield curve may weaken demand from banks, a key buyer of MBS. On the positive side, as mortgage rates rise to their highest level since 2023, suppressing refinancing and home purchase demand, and potentially slowing the growth of home prices and loan sizes, MBS supply is expected to trend downward before the end of the year." (Jinshi)