Market Observations

The first quarter of 2025 saw significant challenges in the US stock market, with the S&P 500 falling 4.6% and the NASDAQ dropping 10.4%. Concerns over the Trump administration’s tariff policies and their economic implications contributed to this downturn. Additionally, the Russell 2000 decreased by nearly 10% amid expectations of prolonged higher interest rates from the Federal Reserve. In times of market volatility, portfolio diversification remains a key strategy to mitigate risk and navigate uncertainty.

While US stocks struggled in Q1 2025, international large caps gained over 7%, and bonds rose nearly 3%. This marked the first time since 2020 that bonds outperformed stocks in a quarter. The decline in US equities contrasts sharply with the end of 2024, when the S&P 500 had enjoyed two consecutive years of gains exceeding 20%. This highlights the importance of diversification and the variable nature of market performance.

Q1 2025 was a tale of two markets: before the inauguration, and after the inauguration. President Trump entered office on a pro-business platform, offering to reduce taxes and red tape, which helped to extend the rally that began after the election. Since the inauguration, Trump’s stop-and-start tariff policies aimed against America’s major trading partners kept investors off balance. Market sentiment shifted from optimism about tax cuts and deregulation following Republican electoral victories to worry about tariff policy uncertainty and the impact of DOGE cuts to government spending. *The Magnificent Seven rose 2.2 per cent through Inauguration Day but plunged 18.1 per cent from Inauguration Day through the rest of the quarter as the US Policy Uncertainty Index flirted with levels not seen since the pandemic or the financial crisis. In fixed income, yields fell across the curve. The 10-year Treasury yield declined 35 basis points to end the quarter at 4.23%, while the 2-year yield dropped 36 basis points, reflecting growing expectations that the Fed may ease policy later in the year amid cooling inflation and softer economic data. Credit spreads began to widen modestly, particularly in high yield, which underperformed relative to investment-grade debt. Municipal bonds were the lone major fixed income sector to post negative returns, as increased supply met tepid demand.

(MSR) Mortgage Servicing Rights Insights

Despite broader market volatility, the MSR market exhibited notable resilience in Q1 2025. While bulk trading activity was limited—particularly among auctioned packages—pricing for MSRs remained strong. Larger bulk deals are predominantly completed by strategic acquirors looking at MSRs as another customer acquisition channel. Fair market values held firm, supported by steady demand among institutional buyers and continued bilateral trading among holders. Supply of low coupon MSRs is low as sellers are holding on to high fair market value MSRs with packages selling at higher multiples than last year due to the lack of supply.

Loan production volumes remained muted in March, consistent with elevated mortgage rates and tighter affordability conditions. However, short bursts of origination activity were observed during brief rate declines, reaffirming borrowers’ acute sensitivity to rate movements. Prepayment activity, while still subdued on a historical basis, responded directionally to these rate fluctuations. No significant refinancing wave is expected in the near term, though opportunistic refinances may occur as rates periodically retreat and migration prepayments are expected in the summer months.

Looking ahead, we expect MSR transaction volumes to remain modest in the short term due to rate volatility and macroeconomic uncertainty. However, stable servicing cash flows and favorable mark-to-market valuations continue to make MSRs an attractive asset class for investors seeking yield and duration in a rising-rate environment. Barring a sharp reversal in rate trends, sellers may remain cautious, preserving the relatively tight supply of bulk MSRs.