US mortgage bond funds endured some of the worst outflows since 2021 over the past three weeks as surging interest rates drove investors away from the asset class. The Bloomberg US Mortgage Backed Securities Index posted its second-worst performance on record in September, pressured by a sharp rise in Treasury yields to multi-decade highs. The selling was fueled by rising oil prices, persistent inflation concerns, and expectations of further Federal Reserve rate hikes. Mortgage-backed securities are highly sensitive to bond yield swings, which influence borrowing costs across the economy. As rates climb, homeowners typically pause refinancing activity, leaving investors stuck with lower-yielding securities longer than expected.
Erica Adelberg, senior MBS strategist at Bloomberg Intelligence, noted that Fed policy tightening and a flatter yield curve may curb demand from banks, traditionally a major buyer of mortgage-backed securities. However, she pointed out a potential offset: declining mortgage originations and the highest rates since 2023 are reducing refinancing and home-purchase demand, which could slow home-price and loan-size growth.
The broader Treasuries selloff in September pushed long-dated bond yields to 24-year highs. Combined with weak excess returns in mortgage-backed securities, the MBS index recorded the second-most negative year-to-date total return in its 50-year history, according to Adelberg.
Source: Bloomberg Markets · Summarized by HeadlinesBriefing