Stop me when this sounds familiar: There's a disconnect between the Federal Reserve’s official projections and the economic signals policymakers themselves emphasized. Stop? Okay. Despite the Fed delivering a third consecutive 25-basis-point cut and launching $40 billion per month in T-bill purchases, investors largely ignored the near-term easing in favor of the 2026 “dot plot,” which predicts only one cut next year. That outlook looks increasingly fragile: Chair Powell openly questioned the reliability of recent payroll gains, warning that true job creation “may actually be negative,” and the Bureau of Labor Statistics now must backfill two months of missing employment data before the next meeting. With the Fed simultaneously forecasting lower core PCE inflation in 2026 against rising evidence of labor-market deterioration, many in the rates and mortgage markets believe the risks to the policy path skew toward more, not fewer, cuts, particularly if weak labor momentum persists into early 2025.
These shifting expectations contributed to a notable steepening of the Treasury curve. Strength at the front end, reinforced by the Fed’s decision to shift MBS roll-off toward shorter maturities and to remove caps on standing repo operations, pushed the 2s/10s spread to its widest since early September. While this dynamic has supported agency ARMs, it has pressured lower-coupon 30-year MBS and made Treasuries relatively more attractive on a risk-adjusted basis. Importantly, the Fed’s new reserve-management program relies on outright T-bill purchases financed by the creation of bank reserves, a mechanism that expands the money supply and carries the classic inflationary risks associated with debt monetization. How aggressively the Fed employs these tools in coming weeks will influence both curve shape and MBS relative value.
Treasury yields themselves remain range-bound as markets await next week’s CPI and payroll releases. 10-year yields continue to stall near 4.20 percent, and the 2-year is anchored around 3.50 percent, reflecting investors’ reluctance to fully embrace the Fed’s projections. Yesterday’s 30-year auction cleared cleanly with slightly better-than-expected demand, largely from non-dealer investors, and did little to shift prices. Economic data added more noise than clarity: jobless claims rose sharply to 236k, continuing claims hit their lowest since April (both distorted by Thanksgiving seasonality), and the trade deficit narrowed to its smallest since mid-2020. Mortgage rates echoed this mixed backdrop. After nearing year-to-date lows last week, Freddie Mac reported the first weekly increase in three weeks, with the 30-year rising to 6.22 percent and the 15-year to 5.54 percent, both still below year-ago levels but no longer declining.
In today’s mostly out-of-the-money rate environment, large-balance UMBS 30-year pools are paying the slowest, not only because refinancing a big loan is less appealing with rates above 6 percent, but because most of these mortgages are too young to reach peak refinance propensity. Across coupons, speeds continue to decline as loan size rises, and even in otherwise “in-the-money” 5.5-percent-plus coupons, high-balance pools have not yet delivered their typically faster turn times due to limited seasoning. Roughly $170 billion of new loan-balance spec pools entered the market over the past year (primarily in the $275k–300k bucket) ensuring strong liquidity, while major servicers such as Rocket, AmeriHome, and Freedom remain key drivers of prepayment outcomes. Lower-balance pools still lead in speeds for now, but as the largest-balance cohorts age past 12 months, they should begin to accelerate, making the $175k–275k range particularly attractive in higher-coupon stories.
Agency MBS prepayment speeds have declined sharply even with rates holding near mid-September lows, and although seasonal factors may provide a temporary bump, most analysts expect refi activity to remain muted. Refinance indexes are already down more than 30 percent from their recent peak, and the large pandemic-era cohort of ultra-low-rate borrowers continues to suppress turnover and existing-home sales. This slow attrition is eroding convexity across major MBS indices, leaving them increasingly exposed to rate-path volatility. Shorter-duration Fannie 15- and 20-year paper, by contrast, remains better insulated should yields break meaningfully in either direction... an appealing characteristic as markets head into a December defined by stale pre-shutdown data, an unsettled labor picture, and a Fed signaling that the “extent and timing” of future moves are more uncertain than markets or the dot plot presently suggest.