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.)
*The MBS Weekly Market Profile Report corresponds to the commentary below.*
MBS were mixed on the week, with Fannie 2s cumulatively lagging its 10-year hedge ratio by a few ticks while 2.5s through 3.5s managed to modestly outperform. The Fannie current coupon spread appeared to widen about 9 basis points versus Treasuries, but this partially reflects the continued issues associated with the primary coupon (Fannie 2s) having only had a few dealers reporting prepayment speeds. (The median base speed for Fannie 2s dropped from 329% PSA to 308% PSA, which effectively increases its yield by about 3 basis points, all else unchanged.) A notable development is that the rolls for virtually all 30-year liquid coupons are trading special. The Fannie 2% and 2.5% rolls are rolling around 2-3 ticks over their break-even values, and Ginnie II rolls are even more distended. (This excludes the GNII 2% roll; trading in that coupon remains extremely sparse.)
One important factor to watch will be whether purchase activity recovers uniformly across sectors and price points or whether it will remain skewed toward conventional and higher-FICO government loans. The chart below, which contains the MBA’s monthly Credit Availability indices, indicates that jumbo lending fell off a cliff over the last few months; the conventional and government indices fell more modestly, even though the government index reflects the unwillingness of many correspondents to buy government loans with FICO scores below 680. 
Click to enlarge The sharp drop in jumbo lending is also consistent with mortgage aggregators shutting various non-agency programs as the pandemic panic took hold in early March. In addition to short-term home buying considerations, the very early shutdown of non-agency lending (including both jumbo and non-QM programs) raises the question of whether the GSEs can ever be removed from the government umbrella, a future crisis arguably risks the shutdown of a privatized housing finance system.
Lending markets are, however, normalizing a bit. Seasonally-adjusted purchase activity has bounced off its early April lows and, as the accompanying chart of the MBA’s purchase index suggests, has moved back toward more normal levels; apparently, realtors have figured out ways to show houses remotely and/or employ appropriate practices that reduce Covid-19 infection transmission risk. 
Click to enlarge Refi activity has trailed off a bit but, with the refi index in excess of 3400, remains healthy. An interesting question, however, relates to the actual level of mortgage rates, as different indicators have diverged. As highlighted by the accompanying graph, the Freddie Mac survey rate and the MBA’s average contract rate (reported with their application surveys) are currently quite different; the MBA rate is hovering slightly above its all-time low of 3.40% (as of 5/22, the last available report) while the Freddie rate reported on Thursday May 28th at 3.15%. 
Click to enlarge This is the Freddie survey’s all-time lowest print and is 35 basis points below the level reported on 3/26, while the MBA rate last reported only 5 basis points below the 3.50% print for the week ending 3/27.
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.
