MBS Weekly Market Commentary Week Ending 07/10/2020

Intermediate and long Treasury yields declined slightly last week, led by a 10 basis point drop in the 30-year bond yield.  The 10-year yield declined by about 3 basis points, while the 2-10 year spread also flattened by 3 bps, as yields on maturities as long as five years remain pinned in place.  In fact, the short end of the Treasury market has begun to reflect the possibility that the Fed will adopt so-called yield curve control this fall, a variation on quantitative easing where the Fed buys enough securities to cap the yield on a target maturity (generally assumed to be a short-term rate) at a certain level.  What’s interesting is that the 5-year note has begun to trade as if its yield is (or will soon be) pegged, as highlighted by the accompanying chart.  The graph indicates that the 40-day standard deviation of the 5-year yield is approaching its lowest level in years, only a few months after the pandemic-related market disruptions took the note’s volatility to levels last seen during the financial crisis of 2008-10.

*The MBS Weekly Market Profile Report corresponds to the commentary below.* Click to enlarge MBS had a strong week, with the Fannie 30-year current coupon spread over Treasuries tightening by about 12 basis points.  The sector’s strength was highlighted by the strong price performance of Fannies 2s, which rose roughly 5/8ths of a point from 7/2 to 7/10 even as the price of the 10-year note increased by only 7/32s.  (See the chart below for Fannie 2 July-settlement prices since early May.) Click to enlarge However, the outsized (24 basis point) tightening of the Ginnie current coupon spread almost certainly reflects the transition from using the yield on GNII 2.5s to 2s; this is another example of the potential distortions associated with using the quoted current coupon rates and spreads as proxies for MBS secondary market “rates.”

It was notable, however, that Ginnie 2 trading activity picked up last week, averaging about $2.5 billion per day, or between 5-9% of daily Ginnie trading activity.  (Prior to July 1sth, GNII 2% activity only topped $1 billion twice, with average daily activity in June of about $500 million.)  However, using this coupon as a hedging vehicle remains treacherous, as the front-month roll is currently offered at 16/32s, a quite heinous 13 ticks special.  This strongly suggests that hedgers interested in trading GNII 2s have the ability to assign their trades, as pairing off trades will be prohibitively expensive until liquidity further improves.

A recent noteworthy development in the market has been the expansion of the categories in the specified pool markets to include maximum $200K and $225K loan balances.  This makes sense given the expansion of the conforming limit to over $500K, since capping loan balances at even those high cutoffs provides a fair degree of protection from very fast prepayment speeds relative to TBA deliverable cohorts.  (The pools typically delivered into TBAs are assumed to be “adversely selected,” i.e., everything that can’t be sold specified; this is analogous to the third day of a yard sale, where the remaining merchandise is “picked over.”)

It’s interesting to note that the development of these larger-balance specified categories would probably not have occurred under the FHFA’s proposed changes in pooling practices from earlier this year.  One provision of the proposal was that only approved specified pool categories would be allowed to be traded, which would have prevented the type of organic development experienced in the MBS markets over the last few months.  (Note that pay-ups for specified pools disappeared almost entirely in March, even as Treasury rates reached all-time lows, reflecting the liquidity squeeze experienced by both dealers and investors.)  Pay-ups for desired categories have returned and are quite healthy, with even $225K maximum balance GNII 3%s garnering around a ½ point premium over TBAs.

Thanks for reading.

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 1/27/23

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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.