when residential mortgage backed securities fall residential mortgages tend to rise the reverse is also true 10
mbs prices are inversely related to interest rates meaning that existing mbs become less valuable when rates rise also when homeowners refinance their mortgages at lower rates they pay off their existing loans early which can cut the cash flows that investors expect to receive from mbs economic downturns can also lead to increased mortgage defaults resulting in losses for mbs investors despite these challenges the mbs market remains highly active with massive liquidity the federal reserve which bought large amounts of mbs during and after the financial crisis has slowly sold off its holdings as such the market has shifted from traditional bank and fed holdings to money managers and other institutional investors this change is partly because of new regulations and the fed s quantitative tightening program 1112mbs spreads the difference between interest rates sellers must pay investors and 10 year treasurys grew to almost double their pre pandemic levels in 2022 to 2023 though in the mid 2020s those spreads began to narrow this means investors have wanted less compensation for taking them on suggesting more confidence in the quality of these securities however there s also been a more limited supply of mbs given the high interest rates 12