U.S. Mortgage Bond Funds Face Severe Outflows as Rates Climb

U.S. mortgage bond funds are experiencing some of their most severe outflows since 2021, driven by climbing Treasury yields and persistent inflation fears. The Bloomberg U.S. Mortgage Backed Securities Index recorded its second-worst September performance on record, with year-to-date total returns marking the second most negative period in the index's 50-year history.

The Federal Reserve System raised its benchmark interest rate to the 3.75%–4.00% range in September, a move influenced by higher oil prices and general tightening. Market traders anticipate at least three more rate hikes before mid-2027. These rising rates have pushed the average 30-year fixed-rate mortgage above 7%, resulting in a 62% year-over-year drop in refinance applications.

This environment leaves investors with below-market returns because homeowners are avoiding refinancing. Bloomberg Intelligence has analyzed how this policy tightening is impacting bank demand for mortgage-backed securities, while the Mortgage Bankers Association tracked the specific rise of 30-year fixed-rate mortgages to 7.12%.