MBS Weekly Market Commentary Week Ending 06/19/2020

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.


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

MBS struggled last week, as most coupons cumulatively lagged their Treasury hedge ratios by 6-13 ticks.  The Fannie Mae 30-year current coupon spread over Treasuries widened by about 10 basis points, while the Ginnie spread increased by 8 bps.  Dollar rolls continue to trade in excess of their economic values; while June’s Class C notification passed without incident, the offer side of 8/32s for the GNII 2.5 July/August roll is roughly 4+ ticks special.  Fannie 2s are also rolling about 3+ special, while the 2.5 and 3 rolls are special by 1+ to 2 ticks.  One noteworthy landmark was reached on Tuesday, however, when for the first time Fannie 2s were the most actively traded 30-year conventional coupon, with $44.8 billion in daily activity (versus $43.4 billion in Fannie 2.5s).

Both the Freddie Mac and MBA 30-year rates reported new lows last week, which in turn gave a boost to refinancing activity; the MBA’s refi index rose to 3891, its highest level since mid-April.  However, another aspect of this week’s application survey was the continued weakness in ARM applications. The ARM percentage by loan count reported at 2.8%, just a tenth of a percentage point above its low since 2012 and the fifth time since late March that it reported below 3%.  (Note that the ARM percentage by volume, which reported at 7.3%, is also at a multi-year low; it is normally higher than the loan count percentage because average ARM loan sizes are larger.)

The accompanying chart shows the ARM percentage along with the Freddie Mac 30-year survey rate since 2012 and suggests that the ARM percentage and the level of 30-year rates have exhibited a fairly strong relationship over the period. Click to enlarge (The correlation between the ARM percentage and the survey rate is roughly 75%.)  This suggests that the historically low rates available for 30-year fixed-rate loans are attractive enough to lure borrowers away from the ARM product.  This is also consistent with the convergence between fixed and ARM rates, as highlighted by the chart below.  This graph shows the MBA’s 30-year fixed conventional and 5/1 ARM rates over time, and reinforces how much the mortgage curve (as opposed to the Treasury curve) has flattened over the past few months. Click to enlarge One question arises from these data, however:  given the relative levels of the survey rates, why would anyone take an ARM these days?  One factor is the fragmented nature of the ARM market, which differs structurally from the market for fixed-rate loans.  Unlike the fixed-rate market, which is both fairly uniform and driven largely by securitization practices and prices, the ARM market is essentially bifurcated between mortgage bankers and depositories.  Mortgage bankers securitize virtually all their production, and their pricing is strongly influenced (if not dictated) by securities prices; by contrast, depositories are able to hold their production in their portfolios.  Banks and credit unions typically like holding the ARM product, as it fits their interest rate risk profiles better than fixed-rate mortgages.  As a result, it’s often possible for borrowers to find “special” quoted rates from depositories that are well below the ARM survey rates and, by implication, those offered by mortgage bankers.

This in turn raises a number of questions with respect to the future of the ARM product, especially as LIBOR-and CMT-based products are phased out by Fannie Mae and Freddie Mac.  It is entirely possible that the market for ARMs evolves into one dominated by depositories and portfolio lenders, as they will have the freedom to offer products and features not available to lenders subject to agency specifications.



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.