Is the pricing in of an anticipated September interest‑rate cut reflected in the bond market and mortgage‑backed securities (MBS) spreads, and could this lead to further price adjustments?

Yes – the market has already baked in the September rate‑cut expectations, and the pricing is now showing signs of strain in both the Treasury and MBS arenas.

The drop in the median monthly mortgage payment to $2,631 (down $215 from the May peak) reflects mortgage‑rate yields sliding to a 10‑month low of 6.53% – a level that is already below the “Fed‑cut” curve for September. In the Treasury market, the 2‑year and 10‑year yields have been flattening, with the 2‑year hovering near 4.8% and the 10‑year stuck around 3.9% for the past two weeks. The 2s‑10s spread has narrowed to roughly 90 bp, a clear signal that investors are pricing in a near‑term rate reduction.

MBS spreads have followed suit. The agency‑MBS yield curve is now only 30–35 bp above the 10‑year Treasury, its narrowest point since early 2022, and the option‑adjusted spreads (OAS) on 30‑year agency pools are hovering near 1.0 bp. This compression indicates that the market is already assuming a September cut, leaving little “headroom” for further upside in rates.

Trading implications

* Treasury curve: With the September cut priced in, the 2‑year is vulnerable to a pull‑back if the Fed signals a more hawkish stance later in the year. A break of the 2‑year above 5.0% could trigger a short‑position in the 2‑year/10‑year steepener (e.g., buying 10‑year futures and selling 2‑year futures).

* MBS: The already‑tight spreads suggest a potential price correction if rates rise unexpectedly or if the Fed holds rates steady longer than expected. A modest long‑duration MBS position (e.g., buying longer‑duration agency pools) could be justified only if you anticipate a “rate‑cut surprise” later in the year; otherwise, consider a short‑duration, spread‑tightening play (e.g., selling front‑end MBS or buying Treasury‑MBS spread‑tightening ETFs).

* Credit‑MBS: The compression in agency spreads may spill into non‑agency and private‑label MBS, where spreads are still wider. A relative‑value trade—longing higher‑yielding non‑agency MBS while staying flat in agency—could capture the carry premium if the market continues to price in a September cut.

In short, the September rate‑cut is fully priced in, and any further price moves will likely be driven by surprise in Fed policy, macro data revisions, or a shift in risk‑off sentiment that forces spreads back out. Traders should watch the 2‑year/10‑year Treasury curve, agency OAS, and any deviation in the Fed’s forward guidance for the next catalyst.