MBS Weekly Market Commentary Week Ending 10/4/19

Treasury yields moved lower last week, reflecting growing concerns over the economic outlook as well as equity market woes. The yield on the 10-year Treasury note declined by 15 basis points on the week, while the 2-10 Treasury spread widened by about 7 basis points to +12 bps. The rally in Treasuries was a bit aberrant compared to other sovereign debt, as yields for the major European countries, as well as Japan, were little changed on the week. The Fed Funds futures market currently projects around a 70% chance of an easing at the next Fed meeting on 10/30, up from less than a 50% market-implied probability at the end of September.

MBS continue to struggle in the current rate environment amid high dollar prices, elevated prepayment expectations, and (mostly) poor carry. The Fannie current coupon spread over interpolated Treasuries ended the week 3 basis points wider, its widest level in well over a year. Rolls for 30-year Fannie/UMBS continue to trade at less than 2/32s, with 3.5s and higher rolling at negative levels. However, a few coupons, such as GNII 2.5s and Dwarf 2s, are rolling more than 5/32nds special, reflecting their illiquidity. (The average daily volume for GNII 2.5s was $383 million last week, as compared to $8.3 billion for GNII 3s and $2.6 billion for Fannie/UM 2.5s.) Coupon swaps were under pressure last week, as the rally hurt the relative value of higher coupons. The Fannie and GNII 3.5/3 spreads tightened by around 8 and 12 ticks last week, respectively, although the GNII 4.5/4 swap appeared to expand last week by around 7/32s.

The relative value of 30-year 2.5s is an important consideration, given current rate levels and pooling economics. An interesting and useful exercise is to compare the recent behavior of the Fannie 3.5/3 swap with the 3/2.5 swap given 10-year Treasury yields, as a means of evaluating the recent price performance of Fannie 2.5s relative to higher-coupon Fannies. The scatterplot below shows both swaps on the vertical axis given yields on the 10-year note, as shown on the horizontal axis.

The chart indicates that the 3/2.5 swap has been much more volatile than the 3.5/3 swap over the period beginning on July 1st, and its statistical fit versus 10-year yields (as indicated by the R-square value) is considerably worse. In fact, it’s only since 9/13 that the 3/2.5 swap has exhibited a reasonably consistent price behavior vis a vis the 10-year yield. This arguably reflects the relative lack of an investor constituency for Fannie 2.5s relative to other coupons that are relatively far in-the-money but are more liquid and have a more established investor base. (As an example, the Fed only recently purchased a small amount of Fannie 2.5s, after not having purchased any 30-year 2.5%s since May of 2013.)


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 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.

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.