Mortgage bond funds see sharp outflows as Treasury yields surge to multi-decade highs

Mortgage-backed securities (MBS) funds in the United States have experienced withdrawals that place the episode among the seven worst since early 2021. The outflows have unfolded over three weeks as Treasury yields climbed to multi-decade highs, with the 10-year yield touching 5.34% on October 1 before easing to around 5.26%. Higher yields raise borrowing costs, prompting homeowners to stay in existing loans rather than refinance, which reduces cash flow to MBS investors and depresses fund performance.

The Bloomberg U.S. Mortgage Backed Securities Index posted its second-weakest September on record, and its year-to-date return is the second most negative in the index’s 50-year history. Erica Adelberg of Bloomberg Intelligence attributes the sell-off to Federal Reserve tightening and a flatter yield curve that may lower bank demand for MBS, while also noting that MBS supply should decline toward year-end as the highest mortgage rates since 2023 suppress refinancing and new home purchases. The Mortgage Bankers Association says the average 30-year fixed-rate mortgage has risen above 7%, pushing mortgage application volume down and refinancing requests to 62% below a year earlier.