MBS MARKET COMMENTARY
MCT’s Director of Analytics, Bill Berliner, writes a weekly summary of movements in the secondary market. The analysis includes an in-depth view of treasury yields, mortgage backed securities, note rates and more.
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Treasury yields declined modestly last week, led by intermediate and long maturities. The yield on the 10-year note dropped by a little more than 5 basis points, closing at 0.64%, while the 30-year bond yield closed 9 basis points lower to yield 1.37%. The yield curve also flattened a bit, with the 2-10 year spread narrowing by 3 basis points to 47.5 basis points. The 10-year TIPS yield (a proxy for the long-term inflation-adjusted or “real” yield) also declined to -0.69%, its lowest level since April 2013. A notable market development is the bottoming out of realized Treasury volatility, especially for the 5-year note. The chart below shows the 40-day standard deviations for the 5- and 10-year notes; while the 10-year has returned to mid-February levels, the 5-year note’s StDev recently approached its lowest print since mid-2018.read more
Treasury yields were little changed last week, with virtually the entire on-the-run curve closing within two basis points of the previous week’s marks. The 2-10 year spread ended the week a half basis point tighter at 50.6 basis points, while the 5-30 year spread widened similarly. The only notable changes were in the TIPS markets; while the 10-year breakeven rate (a measure of market inflation expectations) widened by just under 9 basis points to +1.29%, the yield on the inflation-adjusted 10-year note declined to -0.615%. Using the Treasuries constant-maturity index for the 10-year TIPS, this was its lowest reported yield since mid-2013 and reflects expectations for very low “real” interest rates in the future.read more
Severe gyrations in the stock markets left intermediate and long Treasury yields sharply lower on the week. The yield of the 10-year note declined by 19 basis points to 0.705%, leaving the yield curve noticeably flatter; short-maturity yields remained pinned in place, reflecting continued accommodative monetary policy. The Fed was, in fact, a major driver of the markets last week, as Thursday’s sharp equity selloff was precipitated by Fed Chairman Powell’s downbeat statement on the short-term economic outlook, as well as concerns that new waves of Covid-19 infections are brewing.read more
Treasury yields spiked higher last week, capped off with an extraordinary Friday session highlighted by an enormous miss by economists’ forecasts for the May employment report. Instead of losing the 7 million jobs predicted by a survey of economists, the job market actually added 2.5 million jobs. While the drop in the unemployment rate may have been overstated by misclassification of workers who were “employed but absent” from work, the report nonetheless highlights the enormous difficulties in predicting the short- and long-term path of the job market and the economy.read more
Treasury prices barely budged last week, with the exception of the very long end of the yield curve, which sold off modestly. The 10-year note ended the week yielding 0.65%, while the new 2-year continued to hover around the 0.15% area, ending the holiday-shortened week yielding 0.163%. The quietude in the Treasury market left the 10-year daily standard deviation at 4.2 basis points, just slightly higher than its level in mid-February when the S&P 500 posted its all-time high level. (For context, it did reach 12.3 basis points per day in early April, slightly higher than its peak in last 2008 and early 2009.)read more
Treasury prices held steady last week, even as equities sank in response to growing pessimism over the economic fallout from the Covid-19 pandemic. The 10-year Treasury yield declined by about 4 basis points week/week to yield 0.644%, while the 2-year yield plumbed its all-time lows to yield 0.147%. The 10-year TIPS break-even rate (i.e., a proxy for projected future inflation) dropped modestly to around 109 basis points (which roughly translates to just over a 1% long-term inflation rate); while very low historically, this measure is still well above its 95 basis point level reached in mid-April, not to mention the 55 bp level reached on March 19th at the height of the crisis.read more
The Treasury yield curve continued to slowly steepen last week, reflecting anxieties over the flagging economy and speculation that the Fed may begin to contemplate negative interest rates. The 10-year note finished the week to yield 0.685%, an increase of about 7 basis points over the previous Friday’s close, while the 2-year note closed at 0.16% after reaching an all-time low of 0.14% on Thursday. On that day the Fed Funds futures market reflected a -0.017% rate at the December 16th OMC meeting, as traders began to speculate what else the Fed might do to support economic activity with a jobless rate approaching 20%.read more
The Treasury market took a breather last week, leaving yields little changed. At 0.614%, the 10-year note’s yield closed a little over a basis points higher than the previous Friday’s level, while the 2-10 spread steepened by about 5 basis points, as the curve “twisted” mildly around the intermediate maturities. With Treasuries settling into trading ranges, their realized volatilities have started to decline.read more
The Treasury yield curve underwent a “twist” last week, as shorter maturity yields rose modestly while yields on longer Treasuries declined. The 10-year yield ended the week at 0.60%, lower by about 4 basis points, while yields on 2- through 5-year notes rose between 1.5 and 2 bps. The 10-year appears to be settling into a trading range of around 0.50-0.80%, while its 60-day standard deviation is also stabilizing at a little over 12 bps per day, and should start declining as the very volatile March sessions start to roll off.read more
Intermediate and long Treasury yields declined last week, as the Treasury market looks to be settling into a trading range after a period of extreme volatility. The 10-year yield dropped by about 8 basis points, leaving the 2-10 year spread narrower by about 6 basis points. The decline in the 10-year yield reflected a sharp decrease in the 10-year TIPS break-even (i.e. the projected future inflation rate), which moved in sympathy with weakness in oil prices.read more