With things still up in the air in terms of geopolitical risk, markets are seeking safer havens. Most recently, this is affecting stocks a bit more than bonds. This correlated movement is in line with conventional wisdom (i.e. buy bonds, sell stocks, or vice versa). But that wisdom often differs from reality . That’s especially true over longer time horizons and truer still when markets are adjusting to a shift in the Fed policy outlook. In other words, rather than promote stock prices and bond yields moving in the same direction, a less friendly Federal reserve pushes yields higher and stocks lower. It wasn’t until this week’s geopolitical flare-up that the correlation returned. How about the mortgage market though? It traditionally correlates almost flawlessly with Treasuries. We already know that covid threw that correlation out the window in 2020, but it had come back nicely by the middle of 2021. Even now, mortgage rates and Treasury yields are moving in the same direction, but definitely not at the same pace. For those that prefer to see outright levels (as opposed to “change”): Viewed another way, here’s the relative performance of MBS versus Treasury yields of comparable maturities. Here too, blame the Fed. The Fed’s recent policy shift hurts the mortgage market on 2 accounts. First, Fed bond buying constitutes a larger percentage of the total buying universe of newly originated MBS than it does newly minted Treasuries. As such, a reduction in overall bond buying is a bigger shock to the mortgage market. Second, the Fed specifically stated it intends to hold only Treasuries in its securities portfolio. Even if that’s only an ‘eventual’ goal, it signifies another degree of MBS-specific unfriendliness on the part of the Fed.