MBS Weekly Market Commentary Week Ending 08/21/2020

Long and intermediate Treasury yields edged lower last week as 30-year Treasuries experienced a 10-basis point drop while yield on the 10-year fell by 5bps. The accompanying 2-10 Year spread flattened by 5bps due to the 2-Year yield increasing to .16% on Friday. According to minutes released on Wednesday from the Federal Reserve’s meeting in July, the Fed is not presently considering using yield control to assist as a method of quantitative easing.
Yield control, a monetary policy currently employed by Australia’s central bank and the Bank of Japan, is a variation on quantitative easing where the Fed buys enough securities to cap the yield on a given maturity and thereby fight adverse movements in the yield curve during times of crisis.

The graph below 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.

MBS hedge ratio adjusted performance (relative to Treasuries) remained stable last week as the price on the Fannie 30-year 2 coupon topped out at 103-08+ on 8/17 and prevailed at that level the rest of the week.MBS 5-day cumulative duration-adjusted performance relative to 10-yr and 5-year Treasury notes was also relatively flat on higher coupons. Most notably, the Ginnie 3 coupon fell by about 9 ticks in its 5-day cumulative spread over the 10-year. The drop in performance on the 3 is likely linked to the increased volume and thereby liquidity of the Ginnie 2 coupon in the TBA market, which is now much more widely in use to hedge lower coupon government production. Also noteworthy, Ginnie 2 coupon trading accounted for slightly over 15% of total Ginnie TBA trading on Friday, and the Fed added the Ginnie 2 security to their MBS purchases for the first time last week.

The graph below demonstrates the rally we continue to see on the Fannie 2 coupon in the TBA market.

Primary mortgage rates have begun to float higher in an expected positive correlation between interest rates on new originations and the FHFA’s 50bp refinance tax. Freddie Mac’s Primary Mortgage Market Survey has the 30-Year fixed rate at 2.99% for the week ending on 8/20. Since Freddie’s lowest ever recorded average prime-rate of 2.88% on 8/6, prime rates have increased 3bps in the last week and 11bps over the last 2 weeks. Increasing rates have slowed new mortgage applications and especially hampered refinances according to data provided by the MBA’s Weekly Application Index. Total applications are down 3.8% and refi’s are down 5.3% week over week.

Financial repercussions of the Covid-19 pandemic continue to surface as data provided by one servicing vendor show delinquencies falling to 9% from June, although they are still over 100% higher than they were last year. Their data also suggests that early-stage delinquencies, loans with a single missed payment, have declined lower than pre-covid levels. However, serious delinquencies, those 90 days or more delinquent, have risen to 1.8 million above their pre-covid levels. For government loans, serious delinquencies can affect the performance of the mortgage-backed security for the bondholder. Ginnie regulations allow 90-day delinquent loans to be bought out of pools at par, negatively impacting the bond’s yield. Banks have already bought upwards of $19 billion in delinquent loans out of pools in July and August and it is reasonable to expect that this activity will continue if serious delinquencies continue to trend upward.

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.