MBS Weekly Market Commentary Week Ending 05/29/2020

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.

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.