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 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.