Mortgage-Backed Securities Insights — Week of August 4, 2025

Hi, I'm Jerry Levy, Managing Director of Texas Capital's Mortgage Securities Sales & Trading.

President Trump found the golden ticket for you Willy Wonka fans as nonfarm payroll data came in weak on Friday, and the deterioration in the jobs market was further evidenced by the massive 258,000 revision to both May and June, bringing the three-month total to basically 100,000 new jobs created. 

This is significant because this is the crack in the real data that can lead to the paradigm shift that we've been speaking about to be able to lower rates. The two-year rallied 30 basis points on Friday. That's the most since 2023. The U.S. Treasury curve steepened seven basis points for the two-year 10-year and 13 basis points for the two-year 30-year. The shape of the yield curve matters for mortgage options, as we'll talk about in a bit.

As a reminder, the Fed has been data dependent and as of Wednesday of last week, the job market was considered solid, in the words of Chairman Powell. In fact, post the number on Friday, both John Williams, Fed president from New York, and Beth Hammack, the Fed president from Cleveland, both repeated the solid labor market and warning to "not overreact to one data release" mantra. But this is actually a three-month trend, May, June and July. And while the stated unemployment rate was reported up slightly to 4.2%, it was noted by an independent economics team that it would have been 4.9% if the labor participation rate, which declined again in July, was at the same level as the first quarter of 2025. Let me repeat that: 4.9%. With that jump, there would have been more than just the two dissenting Fed members that we saw last week calling for an ease in September. 

Looking back, I am reminded by former Fed Governor Kevin Walsh's April statement, "there are two problems with data dependence, the data and the dependence." President Trump fired the head of the BLS on Friday. A knee-jerk shoot the messenger. And now will try to alter the Fed's makeup, as he can nominate a replacement for Fed Governor Adriana Kugler as she announced her resignation as well on Friday. This additional appointment may support President Trump's desire for structural changes at the Fed, reducing the size of Fed districts, reducing headcount in addition to lowering rates substantially. 

As for the MBS market, affordability remains the key obstacle for homebuyers and for reversing the housing slowdown. Remember, we are at a lower level of existing homebuyer demand today, with rates now at 6.5% than we were when rates topped out at 7.5% a year and a half ago. Rates are key to improving affordability, but so too are home prices that still need to adjust lower in many geographies, especially those that have seen rapid increases in both insurance cost and taxes. 

On the desk, we welcome refi activity. It's going to pick up, and as a reminder of what we said two weeks ago, we're still about 50 basis points away from that 6% mortgage level, where 14% of existing mortgage holders will have a 50 basis point incentive to refinance. 

This week, we have refunding with the three-year, 10-year and 30-year auctions. We have seen strong overseas and domestic demand for the auctions this summer, and this trend should continue and accelerate rates moving lower. The paradigm shift in rates will continue to play out until the September FOMC meeting. We look forward to this trend shift. Thank you for listening.