U.S. mortgage bond funds have posted withdrawals that place them in the bottom seven outflow episodes since early 2021, according to Bloomberg, as climbing Treasury yields push investors away from risk across fixed-income markets.
The exodus has unfolded over the past three weeks, with climbing interest rates — stoked by higher oil prices, persistent inflation fears, and anticipation of further Federal Reserve tightening — driving the flight, according to Bloomberg. The Bloomberg U.S. Mortgage Backed Securities Index turned in its second-weakest September ever, and by the close of that month its year-to-date total return stood as the second most negative in the index's 50-year history.
Mortgage-backed securities face an outsized vulnerability to bond-yield swings because higher borrowing costs prompt homeowners to stay in their existing loans rather than refinance. That slowdown in refinancing activity leaves investors stuck with below-market returns for an extended and unpredictable period, according to Bloomberg.
"Fed policy tightening and a flatter curve may reduce demand from banks, a key source of MBS demand," Erica Adelberg, senior MBS strategist at Bloomberg Intelligence, wrote. "On the positive side, MBS supply should trend lower into year-end, with the highest mortgage rates since 2023 reducing refinancing and home-purchase demand."
The selloff in Treasury markets has been severe. The 10-year yield touched 5.34% on October 1 — a level last seen in 2002 — before pulling back to around 5.26%, part of the bond market's worst quarterly rise in yields this century . The 30-year Treasury bond reached a 24-year peak before also retreating.
The pressure on mortgage borrowers has been building for weeks. The average rate on a 30-year fixed-rate mortgage crossed 7% for the first time since early 2025 , reaching 7.12% in the week ended September 18, the highest level since May 2024, according to the Mortgage Bankers Association. That rate increase pushed overall mortgage application volume down 1.5% week-over-week, with refinance applications falling 3% and sitting 62% below year-ago levels.
The Fed raised its benchmark interest rate by a quarter of a percentage point to the 3.75%–4.00% range in September, with nearly all policymakers projecting at least one additional increase before year-end. Traders now expect at least three more Fed rate hikes before mid-2027, according to Bloomberg.
