Heard on the Street · Mortgage Bonds

The Sub-3% Mortgage Brag Is Fading. That’s a Warning for Mortgage-Bond Investors.

Millions fewer Americans hold sub-3% loans, and far more have rates they’d happily refinance. For mortgage bonds, that means a rate move in either direction can bite.

By Sean Anees Saifi · Capital Wealth · Published Tuesday, September 15, 2026 · Source: The Wall Street Journal, September 15, 2026 edition (Heard on the Street)

Key Points

Mortgages under 3% fell from nearly 15 million at the end of 2021 to under 12 million in July, Intercontinental Exchange data show.
Loans at 5% or more now make up over 40% of unpaid balances, up from about 10% at the end of 2022.
A benchmark mortgage-bond index yields about 5.8%, versus just under 5% for 10-year Treasurys, partly because of prepayment risk.
If refinancing speeds up or slows down, a mortgage bond’s life shrinks or stretches, so investors can be disappointed either way.
Strategists at FHN Financial say the market is very complacent about faster refinancing; nonbank servicers profit from pushing refis.

Under 12M

sub-3% U.S. mortgages in July, down from nearly 15M

40%+

share of unpaid balances on 5%-plus mortgages

5.8%

benchmark mortgage-bond yield; 10-year Treasury just under 5%

4.3%

iShares MBS ETF annualized return, past three years

A small pink stucco house with a red tile roof under tall palm trees as dark storm clouds gather overhead. — Mortgages at 5% or higher now carry more than 40% of unpaid balances. If rates fall, those borrowers could refinance quickly; if rates rise, mortgage bonds’ lives could stretch and their prices could fall harder.

In one line: As fewer homeowners hold ultracheap loans, refinancing can shorten or stretch mortgage bonds’ lives, so their extra yield comes with risk whichever way rates move.

For a few years, a sub-3% mortgage was the ultimate cookout brag. This Labor Day, millions fewer Americans had one. Active U.S. mortgages under 3% fell from nearly 15 million at the end of 2021 to under 12 million in July, according to Intercontinental Exchange (ICE) data. For mortgage-bond investors, Heard on the Street’s Telis Demos writes, that’s a warning light.

The prepayment catch

Mortgage bonds pool home loans. Ones issued by government-sponsored enterprises such as Fannie Mae and Freddie Mac offer extra yield without credit risk — the danger that unpaid loans cause losses. A benchmark index of 30-year mortgage bonds yields about 5.8%, versus just under 5% for 10-year Treasurys.

Part of that gap pays for prepayment — borrowers paying off loans early, often by refinancing. When rates surged, that risk went quiet, since nobody trades a 3% mortgage for a 7% one. Now the mix has shifted: loans at 5% or higher went from around 10% of unpaid balances at the end of 2022 to more than 40% in July, per ICE.

The extra yield has paid off lately. The iShares MBS ETF (MBB) returned an annualized 4.3% over the past three years, about 1.2 percentage points more than the iShares U.S. Treasury Bond ETF (GOVT), according to FactSet.

Lose more, make less

Here’s the rub: that shift cuts both ways. If rates fall and refinancing takes off, bonds get repaid early and the cash must be reinvested at lower yields. If rates rise, refinancing stalls and the bond’s life stretches out, raising its duration — how far a bond’s price moves when rates change. Harley Bassman, author of The Convexity Maven website, sums up the trade-off: “you can lose more when rates are rising, and make less when rates are falling.”

For now, Demos sees little prospect of falling rates. The 10-year Treasury yield touched 5.012% on Monday, and investors expect the Federal Reserve to raise rates this week. Still, FHN Financial strategists called the market “very complacent” about prepayments speeding up. Nonbank servicers — firms that manage the loans — profit from volume and push refinancing hard, and Morgan Stanley (MS) strategists have weighed how AI could speed up the paperwork.

That’s why a bond fund’s label deserves a closer look. Funds called “core” or “aggregate” aim to track the broad bond market, which can include government-backed mortgage bonds. The sector breakdown on the fact sheet shows how big that slice is.

What It Means For Your Portfolio

Watch — know what your bond fund owns

Mortgage bonds’ extra yield comes with a catch — refinancing can shorten or stretch their lives — so know how much of your bond fund sits in them.

Extra yield is always payment for some risk. With mortgage bonds, homeowners hold the option: they refinance when it suits them, not when it suits the bondholder. Before leaning on a bond fund for steady income, look at its sector mix, its duration and how it held up when rates jumped. General planning principles, not advice for anyone in particular.

The Capital Wealth portfolios stay defensive on bond duration and avoid long-duration bonds. Safe money sits in Treasury bills and floating-rate Treasuries — the iShares 0-3 Month Treasury Bond ETF (SGOV) and WisdomTree Floating Rate Treasury Fund (USFR). Nothing new gets bought before Wednesday’s Fed decision. An umbrella labeled “windproof” still deserves a test before the storm: bring your bond-fund statement, and fifteen minutes shows what’s inside.

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