Agency MBS returned negative 4.1% in the third quarter, underperforming Treasuries, which returned negative 3.1%, driven largely by modest Agency MBS spread widening.1 Current coupon spreads ended the quarter at 177 basis points (bps), approximately 15 bps wider quarter-over-quarter (QoQ).
Interest rate volatility remained elevated in the period as the two-year Treasury yield rose 15 bps and 10-year Treasury yield rose 73 bps. The Federal Open Market Committee (FOMC) increased the target federal funds rate (FFR) 25 bps at its July meeting while pausing in September. Although the FFR remained unchanged in September, the FOMC delivered a tighter policy outlook. The Summary of Economic Projections signaled the possibility of one more hike in 2023, but two fewer cuts in 2024, amid higher growth projections and lower inflation. Chairman Jerome H. Powell reiterated at his September press conference the Fed’s commitment to reducing its securities holdings at a brisk pace.
