That’s the vibe of the roughly $8.7 trillion market for mortgage bonds with government backing, a key source of funding for U.S. homeowners, heading into next year, according to a BofA Global outlook for 2023.
A backdrop of uncertainty unleashed this year by the Federal Reserve’s campaign to fight inflation through dramatically higher interest rates has resulted in a sputtering housing market. It’s also left those who invest in the bonds used to finance much of the estimated $44 trillion housing market sitting on their hands.
But the “agency” market for government-guaranteed mortgage bonds is “cheap, no one is buying,” the BofA strategy team, including Jeana Curro, Chris Flanagan and Ge Chu, wrote in their outlook. Still, the transition away from cheap debt hasn’t been painless. The Fed has been ratcheting up borrowing costs in an effort to pull down high inflation, with one ripple effect being the 30-year fixed-mortgage rate shooting above 7% in November, a 20-year high, while an affordability crisis has stunted home sales.
Bond funds have been hit hard, with many suffering outflows and continued investor skittishness about whether the Fed’s most aggressive pace of monetary tightening in 40 years might land the U.S. economy in the ditch.
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