Given the behavior of interest rates over the last month, it is concerning that our nation’s profligate spending may be starting to come home to roost. While mortgage rates are always volatile, they have recently increased materially. The average 30 year conventional fixed mortgage rate now hovers around 6.75%. This is up 3/4% from only a month ago.

Additionally, we now have a positively sloped yield curve (see above) from the two to the thirty year. According to the Wall Street Journal’s Sam Goldfarb, “the prospect of a federal budget deficit is fueling a sharp climb in bond yields, with investors betting a challenging fiscal situation will only get worse after the election.” Absent change in this direction, servicers should enjoy low prepay speeds, while MBS/loan investors will experience extension risk.