MBS Yields Hit Six-Month High as Bond Selloff Accelerates
Current-coupon MBS yields rose to 6.01 percent, marking the highest level since mid-January 2025. Municipal bond prices fell sharply over the last two weeks due to heavy issuance and weak demand.
Current-coupon mortgage-backed security yields reached 6.01 percent at yesterday's close. This figure represents a 39 basis point increase from last Thursday. The level is the highest recorded since mid-January 2025. Treasury yields also climbed sharply over the same two-week period.
The selloff was triggered by a hawkish speech from Federal Reserve Chairman Kevin Warsh at Jackson Hole. The movement continued after oil prices spiked. A higher-than-expected Producer Price Index report added to the pressure. Market participants reacted negatively to recent government buyback announcements.
Municipal bonds lag treasuries
Municipal bond performance has deteriorated significantly. Yields on investment-grade munis rose more than Treasury yields across the curve. The 10 to 20-year maturity range saw the largest gaps. Muni-to-Treasury ratios increased substantially as a result.
Debt issuance this quarter has been unusually heavy. Fund flows have decreased. Retail investors have sold bonds in response to the broader fixed-income selloff. This combination has driven down prices for longer-term municipal issues.
Price decline in long maturities
The 16-year muni benchmark yield increased by 66 basis points from July to September 10. The increase from the end of June was 106 basis points. A specific 16-year Virginia Aa2 rated bond saw its price drop from 99.504 to 92.289. The yield on this specific instrument rose from 4.042 percent to 4.699 percent.
Retail demand for munis was strong in the first half of the year. That demand has diminished considerably. New supply remains high for this time of year. The market structure has shifted from outperformance to underperformance.
Recent spread movements
CCMBS-to-Treasury spreads moved slightly above their recent tight range. Implied interest-rate volatility increased as well. As of midday today, CCMBS yields were a couple of basis points lower than yesterday's close. Spreads were also a couple of basis points tighter. The trend remains upward from the start of the month.
