MBS Weekly Market Commentary Week Ending 02/21/2020

Treasuries steadily rallied last week, with the 10-year note ending the week yielding 1.472%.  The drop in yields, triggered by fears that the coronavirus was spreading outside of Asia, was focused in intermediate and long maturities, and left the yield on the 30-year bond at an all-time low 1.915%.  The 2/10 year spread ended the week about 4 basis points flatter, while the 3mo/10 year spread inverted to close at -5 basis points.  The yield on the 10-year TIPS (reflecting the expected long-term real rate) declined by 6.5 basis points, while the TIPS breakeven level (a proxy for projected inflation) also dropped by about 5 bps.


*The MBS Weekly Market Profile Report corresponds to the commentary below.*

Mortgages trailed their Treasury hedge ratios last week, although fuller coupons paradoxically outperformed as investors fixated on “burnout” (i.e., pools that have gone through a rally have already had the “hot” loans refinance, muting their prepayment speeds).  The 30-year Fannie current coupon spread over Treasuries widened by 3 basis points, as did the Ginnie current coupon spread.  Coupon swaps contracted, with the UM30 and Ginnie II 3/2.5 swaps narrowing by 10 and 8 ticks, respectively, while the Ginnie II/UM30 swaps also contracted; as discussed below, Ginnie prices have been under pressure since last fall.

Conventional rolls have had an interesting month.  The Fannie 4 roll, which had traded to a negative drop since the summer rally, suddenly spiked prior to February notification, trading as high as 12+ before settling at around 7/32s on February 10th.  Since then, the front-month Fannie 4 roll has traded slightly positive, despite the dollar price of Fannie 4s approaching the 105 level, as illustrated in the accompanying chart. Click to enlarge At a 1/32 price drop and assuming a 1.75% cost of funds (consistent with where lower-coupon Fannies are rolling), the Fannie 4 roll is imputing a CPR of around 31% which, at current rate levels, is actually fairly slow, and consistent with the burnout story mentioned previously.  (By contrast, the Ginnie II 4% roll is trading at -5/32s, which reflects a prepayment assumption of about 60%.)

In fact, Ginnie prepayment speeds remain very quirky, with even lower coupons prepaying quickly and experiencing anomalous spikes.  The chart below shows the monthly CPRs after issuance for Ginnie II 3% multi-issuer pools issued between January of 2018 and August of last year, along with the average monthly speed for all of the pools. Click to enlarge In addition to being quite fast (with an average in excess of 15% CPR), a number of the pools showed prepayment spikes to almost 40% CPR and higher as soon as four months after issuance.  (Since the multi-issuer pools are generally in excess of $1 billion, the behavior did not result from a few loans paying off, as it would for smaller single-issuer pools.)

Fears of unpredictable prepayment behavior have weighed on the Ginnie Mae MBS market and, in turn, on government loan pricing.  The accompanying chart shows Ginnie II 3% TBA prices since the summer, along with the yield on the 10-year Treasury note (shown in reverse scale).  Click to enlarge The chart indicates that the price of Ginnie 3s has meandered since the beginning of the year, even though the yield on the Treasury dropped by almost 35 basis points over the same period.  This in turn is reflected in rates offered for government loans.  Despite the sharp drop in yields, the MBA survey’s contract rate for FHA loans, which last reported at 3.86%, is virtually unchanged from the beginning of the year, even as the 30-year conventional rate has declined by 14 basis points over the same period.



About the Author: Bill Berliner

As Director of Analytics, Bill Berliner is tasked with developing new products and services, enhancing existing solutions, and helping to expand MCT’s footprint as the preeminent industry-leader in secondary marketing capabilities for lenders.

Mr. Berliner boasts more than 30 years of experience in a variety of areas within secondary marketing. He is a seasoned financial professional with extensive knowledge working with fixed income trading and structuring, research and analysis, risk management, and esoteric asset valuation.

Mr. Berliner has also written extensively on mortgages, MBS, and the capital markets. He is the co-author, with Frank Fabozzi and Anand Bhattacharya, of Mortgage-Backed Securities: Products, Structuring, and Analytical Techniques, which was named one of the top ten finance texts in 2007 by RiskBooks. He wrote and edited chapters for The Handbook of Mortgage-Backed Securities, The Handbook of Fixed-Income Securities, Securities Finance, and The Encyclopedia of Financial Models. In addition, Mr. Berliner co-authored papers published in The Journal of Structured Finance and American Securitization. He also wrote the monthly “In My View” column for Asset Securitization Report from 2008-2012.

10-Year Treasury Yield Curve

Compare this chart with the mortgage rates chart to see how the 10-year treasury and mortgage rates are correlated. Read more below to learn how mortgage rates are tied to the 10 year treasury yield. View raw data on U.S. Department of the Treasury website.


Mortgage Rates Today

The current MBS daily rates are shown below in this chart for 5/1 Yr ARM, Jumbo 30 Yr, FHA 30 Yr, 15 Yr Fixed, 30 Yr Fixed. Sign up for our MBS Market Commentary to receive daily mortgage news in your inbox.

About the Author

Robbie Chrisman, Head of Content, MCT

Robbie started his mortgage industry career with internships during high school and college at Peoples National Bank in Colorado, and RPM & Bay Equity in the San Francisco Bay Area. After graduating from The University of Texas at Austin with a degree in Finance in 2014, he went to work at SoFi, where he rose to Director, Capital Markets assisting in the creation of SoFi’s residential mortgage division before leaving to work for TMS in Austin, Texas. From there, he went to work for FinTech startup Riivos in San Francisco and now is the Head of Content at Mortgage Capital Trading (MCT) in San Diego.

 Join Newsletter or Follow MCT on Social Media:

Previous Weekly Market Reviews by Mortgage Capital Trading (MCT)

Sign up for daily mbs market commentary and review previous commentaries by visiting our commentary category page. Join our email list for further MBS market news, subscribe to receive educational articles, whitepapers, relevant updates, and mortgage market commentary. 

MBS Weekly Market Commentary Week Ending 1/27/23

Even with the most aggressive pace of rate hikes in over a generation during the past year, recent data suggests that there’s still a path to a “soft landing” for the Federal Reserve. The U.S. economy posted the kind of mild slowdown in the last quarter of 2022 that the Fed wants to see as it attempts to tame inflation without choking off growth. Gross domestic product beat expectations to rise at a 2.9% annualized pace, down from 3.2% in the third quarter and a long way from a recession.

MBS Weekly Market Commentary Week Ending 1/20/23

Have you heard? Inflation was so 2022. All jokes aside, after we learned last week that U.S. inflation cooled for the sixth consecutive month (the consumer price index dropped 0.1% in December compared to the month prior), expectations are now that the Federal Reserve is likely to downshift rate hikes to 25 BPS going forward, beginning at next month’s FOMC meeting.

MBS Weekly Market Commentary Week Ending 1/13/23

Pay attention to the bond market rather than the Fed. That’s what I’m hearing as we learned this week that inflation continued to ease in December, though much focus was also on Wells’ exit from the correspondent space and its ramifications. The headline CPI (-0.1% month-over-month, +6.5% year-over-year) posted the slowest inflation rate in more than a year and core inflation (+5.7% year-over-year), which excludes food and energy, also posted the smallest advance in a year.

MBS Weekly Market Commentary Week Ending 1/6/23

While it’s back to business as usual, it was a fairly quiet week as we settled into the new year. Fast inflation and high interest rates dominated the narrative and upended markets across the world last year. When the dust settled, 10-year Treasuries were 200+ BPS higher than the start of the year, the curve inverted in a bearish fashion faster and farther than ever, implied volume spiked, and mortgage spreads were pushed from stubbornly rich to suddenly cheap. The result was an entire trade-able universe moving out of the money, originations grinding to a halt, and duration becoming a function of illiquid trade flows.

MBS Weekly Market Commentary Week Ending 12/23/22

MCT would like to wish everyone a Merry Christmas and Happy Holidays. Talk to close the year has been dominated by the Federal Reserve’s most aggressive policy tightening in four decades and its impact on the economy, and for us the residential housing market.