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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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.

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.