MBS Weekly Market Commentary Week Ending 10/26/18

*The MBS Weekly Market Profile Report corresponds to the commentary below.*

Treasury rallied again last week, pushing the yield on the 10-year note to 3.076% on Friday, its lowest level since October 2nd. The rally was spurred by another bout of volatility in the equity markets, as well as nervousness caused by a rash of mailbombs sent to U.S. political figures. The rally in intermediate and long-term Treasuries served to flatten most of the yield curve; the 2-10 spread contracted by about 2 basis points to +27, although the 10-30 spread widened by 5 basis points to +23.5.

MBS have continued to perform poorly last week. The 30-year current coupon spread over 5-10 year interpolated Treasuries widened to +94 basis points; as indicated by the accompanying chart, this represents the widest level for the spread in over a year. (At the beginning of October, the spread was around +80.) Click to Enlarge The widening was due in part to the uptick in market volatility, but realized Treasury volatility remains well below where it was last summer; as the chart below indicates, the daily standard deviation (using a 40-day lookback) for the 5- and 10-year Treasury remains more than a half-basis point lower than it was in late July, when the current coupon spread was below +80. The MBS widening was probably due more to the heightened uncertainty and poor tone in the equity markets than the uptick in Treasury market volatility, even though interest rate volatility is more directly linked to MBS valuations. Click to Enlarge Despite the small respite in rates, the note rates of locks in mortgage pipelines continues to move higher. Using MCT’s client pipeline data and fairly standard slotting metrics, we estimate that around 45% of conventional 30-year locks will slot into Fannie or Freddie 4.5s and another 40% will be securitized into conventional 4s, with 5s comprising the bulk of the remainder (around 12%). 30-year government pipelines are even more heavily skewed toward higher coupons; 46% of these locks would slot into GNII 4.5s, and roughly 25% securitized as GNII 5s. For both conventional and government programs, very few locks (2% and 3%, respectively) would slot into 3.5% coupons, and virtually no 3s will be produced.

It’s interesting that trading activity, as reported by FINRA, does not reflect the production dynamics of MCT’s originator pipelines. The chart below shows percentages of average trading volumes by coupon reported for last week’s activity. Click to Enlarge The TRACE data indicates that trading in 5s comprises 4% and 8% of volumes for 30-year Fannies and Ginnies, respectively, while 3.5s represent 24% and 19% of trading volumes in the two products. Moreover, trading in Fannie and Ginnie 3s still made up 14-15% of 30-year trading volumes despite the aforementioned dearth of production in the coupon. While this activity may represent some investors swapping into higher coupons, it is noteworthy that there was roughly four times as much trading in Fannie 3s as in Fannie 5s and more trading in Fannie 3.5s than 4.5s, despite the disparities in production. Bill BerlinerDirector of Analytics

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 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.