By: Editorial Team, StoneX Media
With U.S. Treasury yields trading at multi-decade highs, bank MBS losses are mounting across the agency mortgage-backed securities market. Banks are absorbing those losses because a deeper sell-off and higher mortgage rates cut the value of the agency MBS they already hold, in both held-to-maturity and available-for-sale portfolios. The pressure is landing on the investors who have traditionally anchored demand for agency MBS, and cheaper spreads have so far not been enough to bring fresh buyers in.
Matthew Johannes, StoneX MD and Head of Agency MBS Trading, runs the firm's agency mortgage trading desk in New York, working with institutional clients that trade agency mortgage-backed securities and related products. His coverage spans agency MBS, agency CMBS and collateralized mortgage obligations, with execution and market access across U.S. fixed income markets.
Agency mortgage-backed securities are handing losses to their largest holders as U.S. Treasury yields climb, because a further sell-off and higher mortgage rates cut the value of positions already on the books. That buyer base has traditionally been led by large banks, foreign entities and the Federal Reserve, and the losses land whether banks hold the bonds to maturity or as available for sale. The selling pressure does not stop with the banks. "The mortgage product trades with a lot of leverage. There's a lot of various hedge funds, mortgage REITs that in general participate in the product," Johannes explains, and that leverage turns each leg higher in yields into fresh selling or convexity hedging. Bank portfolios are therefore absorbing agency MBS losses in a market where other holders are adding to the strain.
Agency MBS spreads have cheapened to a level where demand would usually return, yet fears over the global path of interest rates are keeping investors on the sidelines. Spreads remain short of the wides reached in 2022 and 2023, but the gap is narrowing. For bank portfolios, that pause means fewer natural buyers to absorb supply while losses on existing agency MBS holdings grow. Higher rates may eventually slow net supply of new mortgages, which Johannes describes as potentially "a positive for the mortgage market from the spread perspective because there's less supply coming into the market". For now, he says the agency MBS market is "drifting closer and closer to that range, which I think has a lot of people on pause a little bit".
--- Written by Frédéric Guétin, StoneX Media Producer
--- Expert: Matthew Johannes, StoneX MD and Head of Agency MBS Trading
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