U.S. Mortgage Bond Funds See Sharp Outflows as Yields Surge

Investors withdrew money from US mortgage bond funds at one of their fastest rates since the beginning of 2021 as rising interest rates and market volatility weighed on fixed-income investments, Bloomberg reported.

US mortgage-backed securities face renewed selling pressure as rising Treasury yields and higher borrowing costs unsettle fixed-income investors.

Outflows over the preceding three weeks ranked among the seven largest episodes since early 2021. The Bloomberg US Mortgage-Backed Securities Index also recorded its second-worst September performance on record.

The selling followed a sharp rise in Treasury yields, driven by higher oil prices, inflation concerns and expectations that the Federal Reserve could raise interest rates further.

Mortgage-backed securities are particularly sensitive to changes in bond yields, which influence borrowing costs across the economy.

When mortgage rates rise, homeowners are generally less likely to refinance existing loans.

That can leave investors holding lower-yielding mortgage securities for longer than expected.

Erica Adelberg, a senior mortgage-backed securities strategist at Bloomberg Intelligence, said tighter Fed policy and a flatter yield curve could reduce demand from banks, which are important buyers of these securities.

However, the outlook also has some potential offsets. Higher mortgage rates can reduce refinancing and home-purchase activity, slowing the creation of new mortgage-backed securities.

That could limit new supply even as investor demand weakens.

The September Treasury selloff pushed yields on long-dated government bonds to levels not seen in roughly 24 years, according to the report.

The combination of higher yields and weak relative performance left the mortgage-backed securities index with one of its poorest year-to-date total returns in its 50-year history.

The developments highlight the pressure that rising interest rates can place on bond markets, particularly securities whose performance depends partly on homeowners' refinancing decisions.