Worst MBS Underperformance Since October

On the heels of yesterday's weak earnings, First Republic was back in the news this morning with reports that it's exploring a fire sale that would include MBS and other longer-term bonds.  While the MBS in question are not fungible with TBA MBS for many buyers, they add an unexpected dose of supply in the broader MBS market.  Much like SVB's MBS sales a few weeks back, the net effect is underperformance on the mortgage side of the bond market.  In terms of current coupon MBS (a mathematically-derived theoretical coupon priced at par and adjusted for duration expectations), yields are now at their widest spreads versus Treasury benchmarks since October, 2022 (the widest in well over a decade at the time).

What could be making MBS feel so blue?  Easy answer in this case: the Fed.  In the chart below, higher=worse for MBS.  The rapid spike in 2022 correlates utterly perfectly with the winding down of the Fed's MBS reinvestments.  The rapid rate spike would have resulted in some widening regardless of Fed tightening, but the combination was especially potent.