MBS Weekly Market Commentary Week Ending 11/15/19

Treasuries rebounded last week, as the longer end of the yield curve recovered some of the ground lost earlier in the month.  The yield on the 10-year note declined about 11 basis points on the week, closing at 1.83%, while the 5-year yield dropped by just under 10 bps.  The rally in long Treasuries primarily reflected a re-assessment by traders of potential future inflation risks, as the 10-year TIPS break-even declined by 9 basis points.


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

The yield curve flattened a bit over the week, although all maturity spreads remained in positive territory. The closely-watched 2-10 year spread narrowed by about 4.5 basis points to +22 bps, and while the 2-5 year spread narrowed by 3 basis points, it remained positive at just inside 4 bps. Realized Treasury volatility continued to trend lower; the 40-day standard deviation for the 10-year note has declined from around 6 basis points at the end of September to around 4.7 basis points on Friday.

MBS modestly lagged the Treasury rally. The 30-year conventional current coupon spread over Treasuries widened by a couple of basis points, while 30-year UMBS lagged their 10-year hedge ratios by 2-4 ticks over the last five sessions. The 30-year Ginnie current coupon widened by 3 basis points, although the performance was somewhat spotty, with Ginnie II 3s actually outperforming the 10-year note (duration-neutral) by 1/32 while the rest of the tradable coupon stack lagged by 1-3 ticks. Coupon swaps compressed a bit on the week with the exception of the GNII 3/2.5 swap, which improved by 6/32s. UM30 and UM15 dollar rolls are trading at or behind their breakeven levels, while Ginnie II rolls are behaving fairly normally; notably, the GNII 2.5 Nov/Dec roll is, at this writing, offered at 2+ after being offered as high as 8+ early last week.

I attended the first non-QM (“qualified mortgage”) conference sponsored by Information Management Network (IMN) last week in Los Angeles. The sector represents loans underwritten to guidelines that don’t allow for them to receive a “safe harbor” from lawsuits alleging non-compliance with the Ability to Repay provisions of the Dodd-Frank act. While many topics were addressed over the two-day conference, there were a few important take-away points.

  • The sector is growing rapidly and beginning to dominate non-agency MBS issuance.  Standard & Poor’s is projecting issuance of around $25 billion for all of 2019, up from around $13 billion issued in 2018.
  • Future issuance volumes in the sector will be heavily influenced by what the CFPB does with the non-QM “patch.”  This provision allows loans with debt-to-income (DTI) ratios greater than 43% to be purchased or securitized in MBS issued by Fannie or Freddie if other mitigating factors are present in a loan application.  The patch is scheduled to expire at the beginning of 2021.  The patch may be 1) allowed to expire, 2) modified, or 3) extended.   Much of this issuance could be forced into non-agency securities if the patch is simply allowed to expire; at the conference, it was estimated that total annual issuance could reach $200 billion in this scenario.
  • Loans in the sector are currently being underwritten conservatively, with relatively high FICO scores accompanied by low LTVs.  However, concerns were expressed of a potential “race to the bottom” as more entrants enter the sector and compete for volumes by relaxing underwriting standards.  Nonetheless, it’s clear that the rating agencies are currently using very conservative criteria to evaluate and rate transactions, with credit support levels double or triple that of subprime transactions issued prior to the financial crisis.  Moreover, increased competition is also expected to reduce rates associated with the product and make pricing more uniform across the industry.


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.