US bond yield surge boosts mortgage sales

U.S. Treasury bond yields for 10- and 30-year maturities have risen sharply since late February, increasing by approximately 130 and 100 basis points respectively, driven by a surge in oil prices and expectations of Federal Reserve interest rate hikes. This has led to mortgage interest rates reaching their highest levels in three years at 7.4%, which has reduced the number of homeowners refinancing and increased the sensitivity of mortgage-backed securities (MBS) to yield movements. Hedging activities related to convexity associated with rising yields have intensified selling pressure in the bond market, resulting in a decline in the performance of mortgage-backed securities compared to government bonds. The market activity has centered around thirty large interest rate swap trades and increased open interest, with the impact of these hedges diminishing as yields rise — because the attractiveness of refinancing declines and the mortgage market becomes less sensitive to changes in interest rates.

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