- Investors pulled money from US mortgage bond funds over the past three weeks at a pace ranking among the seven worst since the start of 2021, as surging rates drove a flight from volatility.
- The scale is historic rather than merely poor. The Bloomberg US Mortgage Backed Securities Index recorded its second worst monthly performance on record in September, and according to Bloomberg Intelligence has logged the second-most negative year-to-date total return in its 50-year history.
- The cause is the Treasury selloff, which sent long-dated yields to 24-year highs on rising oil prices, inflation concerns and expectations of further Federal Reserve increases. Mortgage securities are acutely sensitive to that, because when rates rise homeowners stop refinancing and investors remain locked into lower-yielding paper longer than expected.
- Erica Adelberg of Bloomberg Intelligence set out both sides. Federal Reserve tightening and a flatter curve may reduce demand from banks, a key source of buying, while supply should trend lower into year-end as the highest mortgage rates since 2023 suppress refinancing and purchase activity.
What Happened?
Mortgage securities underperformed on an excess return basis alongside the broader Treasury selloff, compounding the index decline.
Why It Matters?
The fifty-year framing changes how this should be read. A difficult month in a conservative asset class is unremarkable; the second-worst annual total return in the entire history of the index is a generational drawdown in something many investors hold precisely because they expect it not to behave this way. Agency mortgage securities carry government-backed credit, so this is almost entirely a duration and convexity outcome rather than a credit one, which is worth understanding because the instinct to treat large losses as credit stress would be wrong here. Adelberg’s two-sided analysis contains the question that actually matters. On the demand side, banks are a primary buyer and both tightening policy and a flatter curve reduce their appetite, which is a structural negative that persists while the Federal Reserve is still raising rates and markets fully price a move by year end. On the supply side, mortgage rates at 7.28% have already cut refinance applications 8.7% and pushed the purchase index to its lowest since April 2025, so new issuance should fall. Weaker demand and weaker supply arriving together is unusual, and which dominates determines whether spreads widen further or begin to recover. That is the analysis to do rather than extrapolating the flow data. For allocators the position is genuinely two-sided. An asset class with government-guaranteed credit, at its worst annual return in five decades, with supply contracting, is either an opportunity or a duration trap, and the answer depends almost entirely on the rate path. With the 10-year at 5.29%, the 30-year at 5.66% and a December hike fully priced, the near-term case for duration is not obvious, though the strong non-dealer participation in last week’s 10-year auction suggests large buyers are beginning to find these levels acceptable.
What Next?
Consumer price data on October 14 and the Federal Reserve meeting on October 27 and 28 determine the rate path that drives everything here. Watch whether outflows persist into a fourth week or stabilise, since three weeks of extreme selling often marks capitulation rather than the beginning of a trend. Mortgage issuance volumes are the supply side of Adelberg’s equation and should fall as the highest rates since 2023 work through. Bank purchases of mortgage securities are the demand side and the harder one to observe, though bank earnings disclosures will show portfolio activity. Spreads over Treasuries remain the cleanest measure of whether the asset class has repriced sufficiently to attract buyers back.
Affected Tickers and Coins: MBB, AGNC, NLY
Source: Bloomberg
