Soaring borrowing costs and heightened yield volatility have sparked a record sell-off in mortgage-backed securities while driving U.S. mortgage rates to a multi-month high.

  • Investors pulled $2.4 billion from U.S. mortgage-backed securities (MBS) exchange-traded funds in September, the highest monthly redemption rate since March 2020, Bloomberg reported.
  • The average 30-year fixed home loan jumped 25 basis points in a single week to 7.28%, representing the largest weekly surge in nearly four years and the highest rate recorded since late 2023.
  • Pending home sales fell 4.1% year-on-year in September. 

Rapidly rising bond yields and fears of higher-for-longer interest rates are weighing on U.S. housing and financial markets. 

As borrowing costs march higher, investors are abandoning ETFs tracking mortgage-backed securities (MBS) at the fastest pace in years, while prospective homebuyers face the steepest mortgage rates seen since late 2023, affecting overall home sales.

Investors Flee Mortgage Bond Funds

In the capital markets, exchange-traded funds holding U.S. mortgage debt saw $2.4 billion in net redemptions in September, the heaviest selling in the sector since the onset of the pandemic in March 2020, according to Bloomberg.

The sell-off has been driven largely by a sharp rally in U.S. Treasury yields, which have hovered near multi-decade peaks amid expectations that the Federal Reserve will keep monetary policy tight to combat inflation. 

Because surging benchmark rates reduce the likelihood of homeowners refinancing, holders of mortgage debt risk remaining locked into lower-yielding assets for extended durations. Furthermore, with risk-free Treasuries offering nominal yields above 5%, the complex structure of mortgage bonds has grown increasingly unappealing to market participants.

For instance, BlackRock’s iShares MBS ETF (MBB) logged roughly $2.7 billion in monthly outflows—its largest on record—and posted a 3% total loss for September. Competitor funds, including the Schwab Mortgage-Backed Securities ETF and the Simplify MBS ETF, also notched record monthly redemptions of $245.8 million and $342 million, respectively, as per Bloomberg. 

Home Borrowing Costs Hit New Highs

According to data released by Freddie Mac, the average benchmark 30-year fixed mortgage rate escalated to 7.28%, up from 6.34% a year earlier. The 25-basis-point single-week increase represents the sharpest weekly spike in borrowing costs since October 2022.

Economists note that the rapid rate rise has sharply undermined home affordability, compounding challenges for prospective buyers who are already grappling with near-record purchase prices. Consequently, real estate demand is deteriorating rapidly across multiple metrics.

Cooling Housing Demand

Data shows pending home sales fell 4.1% year over year in September, while loan application metrics from the Mortgage Bankers Association dropped to their lowest point since April 2025. Refinance applications fell sharply as well, tumbling another 8.7%.

To adapt to the tightening environment, an increasing proportion of sellers are forced to reduce asking prices. According to Realtor.com, the percentage of listings with price cuts hit its highest September level since 2018. 

On Stocktwits, retail sentiment around the SPDR S&P 500 ETF (SPY), which tracks the S&P 500, remained ‘extremely bullish.’ Sentiment for the Invesco QQQ Trust (QQQ), which tracks the Nasdaq-100, and the SPDR Dow Jones ETF (DIA) stayed ‘bullish’.

Sentiment on iShares 20+ Year Treasury ETF (TLT) was ‘bullish’, with ‘high’ message volumes. 

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