The Implications of Recent Mortgage Rate Volatility for Real Estate and Bond Investors

The Federal Reserve's 2025 rate cuts have introduced a new layer of complexity for investors navigating the interplay between mortgage rate volatility, real estate dynamics, and . With the Fed
reducing its benchmark rate by 25 basis points at year-end 2025 and signaling further cuts in 2026, the ripple effects on mortgage rates-though indirectly tied to the 10-year Treasury yield-have created opportunities and risks for asset allocators. As mortgage rates are
, investors must strategically reallocate capital to hedge against volatility while capitalizing on sector-specific dislocations.

Mortgage-Backed Securities and Regional Housing Market Reactions

Mortgage-backed securities (MBS) have shown resilience in 2025, driven by suppressed refinancing activity and strong equity positions in residential real estate. , purchase mortgages declined slightly,
reflecting a cautious lending environment. Agency MBS, in particular, have benefited from contained prepayment speeds, though
higher interest rates have increased prepayment expectations for mortgages with elevated note rates, potentially impacting servicing values.

Regional housing markets have reacted unevenly to rate changes. For instance, the South and West have seen median sale prices decline due to oversupply from pandemic-era construction booms, while the Northeast continues to experience price growth amid limited inventory
as market volatility intensifies. These divergent trends underscore the need for localized real estate strategies, such as
targeting multifamily properties in high-demand rental markets to secure stable cash flows.

Strategic Hedging and Asset Reallocation

Investors are increasingly adopting hedging instruments to mitigate mortgage rate volatility. A notable example is the use of by mortgage firms to hedge (MSRs). One major company reported a
$200+ million gain from these hedges in Q3 2025, effectively offsetting MSR value declines. The liquidity and lower margin requirements of SOFR-based derivatives have made them a preferred tool,
particularly for mid-sized servicers seeking cost-effective risk management.

For real estate investors, the focus has shifted toward income-generating assets like real estate investment trusts (REITs), which
as Treasury yields fell and Fed dovishness spurred demand. Conversely, bond investors are capitalizing on falling rates by allocating to high-quality, ,
which offer attractive yields in a soft-landing scenario. This dual strategy-balancing real estate's inflation protection with bonds' yield potential-has become
a cornerstone of 2025 portfolios.

Case Studies in Hedging and Reallocation

Institutional investors have also leveraged forward-starting receive-fixed swaps to hedge against rate cuts. For example, KeyCorp
in Q3 2025, positioning itself to benefit from declining rates. Similarly, the (RBC) relief program has
incentivized hedging by reducing capital requirements for firms with a track record of managing interest rate exposure.

On the real estate-to-bonds front, J.P. Morgan's 2025 report highlights how fixed income has become
against growth slowdowns, with investment-grade bonds offering diversification and income in a low-volatility bond market. This shift, however, is viewed as a short-term tactic, as real estate's long-term inflationary resilience remains
a key draw for investors.

Conclusion

The 2025 mortgage rate environment demands a nuanced approach to asset allocation. By leveraging hedging tools like SOFR futures, prioritizing cash-flow real estate assets, and strategically reallocating to high-yield bonds, investors can navigate volatility while capitalizing on sector-specific opportunities. As the Fed's rate-cutting cycle progresses and regional housing dynamics evolve, proactive management of fixed income and real estate exposures will be critical to optimizing returns in a shifting rate landscape.