Investors are rotating out of U.S. mortgage-backed securities at a record pace as a rise in Treasury yields makes the assets increasingly unattractive.
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Investors sold $2.4B worth of shares in exchange-traded funds that own U.S. mortgage-backed securities, the fastest sell-off since March 2020, Bloomberg reported.
Mortgage-backed securities are squeezed when bond yields surge, as they have been in recent weeks, and investors are left holding older-dated loans paying below-market rates.
BlackRock’s iShares MBS ETF shed roughly 3% on a total return basis in September, Simplify MBS ETF saw $342M in outflows, and Schwab Mortgage-Backed Securities ETF saw $246M in outflows for the month — a record pace of sell-offs for all three financial vehicles, according to Bloomberg.
The broader U.S. bond market was down 2.4% in September.
Investors are shifting strategies as yields for U.S. Treasury bonds continue a historic run, with the 10-year clearing 5.3% this week, its highest level since 2007. The 10-year is used to price all sorts of debt, including commercial real estate, and the increased cost of borrowing is holding up some deals that were priced in a more accommodating environment.
Yields have continued to climb after the Federal Reserve raised its benchmark interest rate in September for the first time since 2023, and the sell-off pushing yields higher comes despite a commitment from Treasury Secretary Scott Bessent to buy up to $6B in longer-dated debt to help support the market.
Investors are weighing their bond exposure against what has been consistently elevated inflation and a war with Iran that is driving up energy costs and adding further upward pressure on pricing.
The core Personal Consumption Expenditures Price Index, the Fed’s preferred metric on inflation that strips out food and energy costs, sat at 3% in August, while overall PCE was a more elevated 3.4%. Both measures were flat month-over-month and remain far off from the central bank’s stated 2% target rate.
The U.S. added 29,000 jobs in September, missing analyst expectations, and the unemployment rate ticked up 10 basis points to 4.2%, according to the U.S. Bureau of Labor Statistics. The latest jobs data, released on Oct. 2, also revised August’s number down by 29,000 jobs to 133,000 jobs created.
The Fed meets again at the end of the month to decide whether another rate hike is needed to try to tame inflation. After Friday’s weak jobs report, futures traders priced in a roughly 20% chance that the central bank would vote for another 25-basis-point hike, according to CME Group’s FedWatch tool.
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