MBS Weekly Market Commentary Week Ending 04/17/2020

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.


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

MBS struggled last week, as the Fed tapered back its purchases of the product amid continued weak institutional demand.  The conventional and FHA 30-year current-coupon spreads widened by 17 and 18 basis points, respectively, while the 15-year conventional spread over the 5-year closed about 27 bps wider.   The most liquid coupons (FN/G2 2.5s and Dwarf 2s) trailed their Treasury hedge ratios by over three-quarters of a point.  Both the 30-year Fannie and GNII 3.5/3 coupon swaps remained under severe pressure; the Fannie 3.5/3 swap closed at 8/32nds, while the GNII swap moved back to -18/32s, closing in on its worst level of -28 ticks that it reached in March.

Fed purchases were more than $14 billion lower from the prior week despite reflecting a full five days of purchases.  The table below shows the Fed’s purchases by product and coupon; they basically reduced all their purchases except for Fannie 2.5s and (to a lesser extent) 15-year 2s and 3s. Click to enlarge Their average daily purchases dropped from over $20 billion to roughly $13.6 billion.  Their activity arguably reflected the desire to find the “right” level of purchases to keep the market stable (and liquidity healthy) without pushing prices inordinately higher.  The Fed is planning to further reduce its daily purchases this week to something in the area of $10-12 billion, which hopefully will continue to support the sector without causing prices to spike.

One interesting development last week was the uptick in conventional 2% trading.  FINRA only starting breaking out trading in UM30 2s on 4/9; prior to that, they only listed “<=2.5%” on their daily reports.  Trading rose from virtually zero at that point to over $5 billion on Friday, and while that pales beside the respective $84 billion and $50 billion recorded for UM30 2.5s and 3s it still represented an impressive total, especially since about $3.2 billion was in specified pools (versus the $6-7 billion in conventional 2.5s and 3s).  A key question remains whether the Fed will ever purchase the coupon; they only began purchasing 30-year 2.5s late last year after eschewing them since 2013.

Finally, overall application activity remains fairly robust in spite of the pandemic-induced spike in unemployment and the resulting weak purchase market.  The chart below shows the MBA’s composite (i.e., total) application index, re-indexed so that the first quarter of 2015 represents a level of 100.  The chart indicates that while overall application activity is about 35% off its early March highs it is still about 82% than its average from September 2013 through the end of 2019.  This suggests that once the backlog of locks in lenders’ pipelines clears out there should be a lot of refinancing business to be done at the current all-time low levels of mortgage rates. Click to enlarge



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.

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Previous Weekly Market Reviews by Mortgage Capital Trading (MCT)

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MBS Weekly Market Commentary Week Ending 3/31/23

The market reaction went a little “too far, too fast” in regard to the Fed policy pivot. We witnessed the coupon stack (i.e., the price spread between TBA coupons) decompress in more than a trivial manner in a short period. However, the primary mortgage market has been largely reluctant to follow the Treasury rally, and mortgage rates have ultimately not dropped by the same amount as Treasury yields.

MBS Weekly Market Commentary Week Ending 3/24/23

The FOMC raised its benchmark rate by 25 basis points to a new range of 4.75%-5.00% on Wednesday, a middle ground policy move made in the hope of tampering inflation without further harming the banking system. The raise marks the 9th consecutive rate hike since the Fed began hiking in May of last year and brings the target fed funds rate range to the highest level since September 2007. While the central bank’s monetary policy has been aimed at correcting inflation, it has also revealed hidden weaknesses (e.g., entities whose balance sheets relied on low interest rates).

MBS Weekly Market Commentary Week Ending 3/17/23

Next week will reveal the Fed’s resolve on continuing to beat the drum on their aggressive inflation fight. The word until now has been that the central bank will keep hiking interest rates until inflation is under control.

MBS Weekly Market Commentary Week Ending 3/10/23

Events this week likely will lead to a higher peak interest rate than investors had been expecting just weeks ago. Central bankers appear worried about a cycle in which workers seek higher pay to offset inflation’s bite, and in turn trigger more price increases. In fact, inflation remains high because people have jobs and earn enough income to cover stubbornly expensive housing costs. Robust hiring is good for the economy and workers, but elevated pay growth puts added pressure on the Fed to bring down earnings. 

MBS Weekly Market Commentary Week Ending 2/10/23

The week after the jobs report is generally pretty data-light, and this week was no exception. With a dearth of data, market movement hinged on “Fed speak” and consumer sentiment. We saw some volatility return to bond markets as investors built in expectations for a more hawkish Fed. As a reminder, the Fed raised its benchmark rate last week to a range of 4.5% to 4.75%. Let’s run through what we’ve learned in the wake of that decision and a robust U.S. payrolls report that took some wind out of investors’ sails that had hopes for rate cuts by summer.

MBS Weekly Market Commentary Week Ending 2/3/23

As strong as economists may have thought the job market was, it’s even stronger. In addition to headline non-farm payrolls in January (517,000) beating estimates by around 300,000, employment numbers were revised higher for the past two months. Yes, a tight labor market is anathema to any sort of quick stop to the Federal Reserve’s rate hiking cycle, but the growth rate in average hourly earnings is declining, which will be welcome news to Fed Chair Powell and his colleagues. There exists a raging debate among economists over whether we’ll need a sharp rise in unemployment to keep inflation low.