MBS Weekly Market Commentary Week Ending 10/23/2020

Intermediate and long-term Treasury yields crept up 10-12bps last week. The 30-year Treasury is currently yielding 1.61% and the 10-year is 0.84%. The sell-off in Treasuries was induced by increasing expectations for a stimulus package either passed before the election (unlikely), or by a democratic win in the election based on recent polls.

The Fannie Mae 30-year current-coupon spread to the 5/10-year blend tightened 2 basis points to +79 as the U.S. Treasury 10-year yield rose 3 basis points to 0.86%. The spread between FNMA 30-year 2 and the 10-year Treasury is the lowest its been in 15 months.

Refinance activity increased 0.2% for the week ended Oct. 16, according to the Mortgage Bankers Association, following the previous week’s 0.3% drop. The refi index stands 74% higher on the year. The purchase index decreased 2.1%. The conventional refinance sub-index fell 0.7% while the government sub-index was up 2.7%. VA and FHA refinancing applications fell 8.5% and rose 17.6%, respectively. The FHA sub-index has risen 29% over the past month; the VA index has increased 5.4%. The average size for a refinance loan decreased to $294.0k from $294.2k. Its YTD low of $284k was seen in January. The Freddie Mac 30-year mortgage rate is at 2.81%, a record low. The Mortgage Bankers Association forecasts purchase originations will increase to $1.54 trillion in 2021, which would surpass the current annual record of $1.51 trillion seen in 2005.

The Federal Housing Finance Agency said on Wednesday, Fannie Mae and Freddie Mac will be permitted to continue buying certain single-family mortgages in forbearance through Nov. 30.

Cumulative 5-day performance of MBS was a mixed last week. Fannie 30-year coupons performed incongruently with the 10-year Treasury benchmark. Most notably, the 2.5 coupon underperformed by 7 ticks and the 3 coupon finished flat. Higher coupons, including the 2, outperformed the benchmark by 6-13 ticks. Ginnie securities saw more consistency as lower coupons underperformed the 10-year by 1-6 ticks, and higher coupons were 8-15 ticks better. Fannie 15-years were much quieter with lower coupons finishing the week flat and higher coupons outperforming by 4-6 ticks.

A large short position is building in long-maturity Treasuries due to blue-wave sentiment. See the chart below. Click to enlarge Recent polling has resulted in a blue-wave sentiment that cruxes on a democratic win in the general election, and a blue majority in the house. The yield-curve is currently bear-steepening with contingents on significant fiscal stimulus passing if the blue-wave theory holds true. This narrative poses significant down-side risk for mortgage lenders whose positions have (until recently) benefitted from overweighting long-positions on originations because interest rates could begin to drift upward while MBS prices decrease.

Fortunately, the Fed has maintained that they will continue their buying of MBS and Treasuries at the same pace to maintain the low yields we have been seeing (somewhat implicit yield-curve control). Be wary though, due to a phenomenon known as convexity hedging, MBS have a way exacerbating a sell-off in panicked times as investors look to shorten the duration of their portfolio. Suffice to say, adequately hedging a portfolio of originations is as important as ever right now.

Key events this week:

  • Monday: New Home Sales, Manufacturing Activity
  • Tuesday: House Price Index, Consumer Confidence
  • Wednesday: Mortgage Applications
  • Thursday: Initial Jobless Claims, Pending Home Sales, GDP

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.