U.S. Mortgage Bond Funds Hit by Worst Outflows Since 2021
nashnova research
US MBS funds suffered their worst outflows since 2021 over the past three weeks as long-term Treasury yields surged to a 24-year high — the higher rates climb, the less appealing these bonds become, and whether year-end supply shrinks enough to offset fading demand will determine when the bleeding stops.
How much money left, and why?
Over the past three weeks, US mortgage-backed securities (MBS — bonds created by bundling thousands of home loans and selling them to investors) funds saw massive redemptions, ranking among the seven worst outflow episodes since 2021.
The trigger: long-term US Treasury yields hit a 24-year high in September, driven by rising oil prices, inflation fears, and bets that the Fed will keep hiking.
This means → investors are rushing out of the assets most sensitive to rate swings, and MBS sits right at the front of that line.
Just how bad is MBS performance?
The Bloomberg US MBS Index posted its second-worst month on record in September; its year-to-date total return is the second-worst in the index's 50-year history.
Measured by excess return — how much an asset beats or trails the risk-free rate — MBS lagged the broader market as well.
In plain terms = no matter which yardstick you use, MBS is turning in a report card close to the worst in half a century.
Why does rising rates hurt MBS so much?
MBS is highly sensitive to rate moves. When rates rise, homeowners stop refinancing — taking out a new, more expensive loan makes no sense — so prepayments drop.
This means → investors are stuck holding older, lower-yielding bonds for longer than expected; their capital is effectively locked in.
In plain terms = rates went up, but the coupon on your old bond didn't — and you can't sell it easily or wait for early repayment. You lose on both ends.
Who else is pulling back on the demand side?
Erica Adelberg, senior MBS strategist at Bloomberg Intelligence, noted that Fed tightening plus a flattening yield curve could further erode banks' appetite for MBS.
This reflects a deeper signal: banks have historically been among the largest, steadiest MBS buyers. When they step back too, the market loses one of its "buyers of last resort."
Is there any good news?
Adelberg also pointed out that the highest mortgage rates since 2023 are suppressing refinancing and home-buying demand, so new MBS supply should decline toward year-end.
Lower supply could also slow the rise in home prices and loan sizes, indirectly easing pressure on the existing MBS stock.
This means → whether year-end supply contraction can offset the sustained demand drain is the key variable for judging if this outflow wave has bottomed — for now, the two forces are still pulling against each other, and the direction is undecided.
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