MBS Weekly Market Commentary Week Ending 11/22/19

The Treasury curve underwent a notable bull-flattener trade last week, as short interest rates moved higher while intermediate and long Treasury yields dropped. The 10-year note closed at a 1.77% yield last week, a week/week decline of 6 basis points, while the yield on the 2-year note rose by just under 2 basis points to 1.63%. The yield curve “twist” left the 2-10 year spread flatter by 8 basis points, while the 2-5 year spread re-inverted (by a half basis point).


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

The rally in longer rates was driven by declines in “real” yields (i.e., rates excluding inflation); while the 10-year TIPS yield dropped by about 5.5 basis points, the 10-year break-even rate (i.e., the cash Treasury yield minus the TIPS yield, an indicator of expected future inflation) barely budged. Realized Treasury volatility continues to plummet; as the accompanying chart indicates, the daily 40-day standard deviation of 10-year yields is approaching 4.5 basis points after peaking at around 6 bps in early September. Click to enlarge MBS endured a difficult week, with the sector unable to keep up with the rally in intermediate Treasuries. Most 30-year UMBS and Ginnie IIs lagged their 10-year hedge ratios by 5-8 ticks, with a few coupons (e.g., conventional and GNII 4.5s) trailing 10s by a quarter-point and 10/32s, respectively. Defying the market rally, trading in UM 2.5s shriveled, comprising less than 7% of last week’s 30-year conventional volumes. (For context, 2.5s represented 12.5% of volumes for the week of 10/28-11/1, reaching a high of about 18% on 10/31.) Interestingly, the drop in 2.5% trading volumes coincided with Fed purchases of $450 million of the coupon, their first 2.5% purchases in a month.

Rolls remain fairly cheap, with only a few (GNII 2.5s and 3s) trading a tick or more special. In fact, the front and back UM30 3.5 rolls turned negative, well below their break-even (economic) value of around 3/32s (using a 1.875% COF and 15% CPR). On its face, this looks reflect significant fears of a spike in prepayments, as the break-even CPR for a drop of zero is 43% CPR (or 1348% PSA), much faster than recent prints or projections. (2018-production Fannie 3.5s, the fastest vintage for that coupon, prepaid at 27% CPR in October; the Bloomberg median projected speed for the coupon is currently 462% PSA.) While this may also reflect concerns over year-end funding pressures, higher-coupon conventional Jan/Feb rolls are also trading well behind their break-even values.

Mortgage originators are often tempted to view their offerings in the context of published average rates for the industry. The three most commonly used rate surveys are:

  1. The Freddie Mac survey rate, published weekly for both 30- and 15-year conventional loans;
  2. The Bankrate.com national averages, published daily for a variety of fixed- and adjustable-rate products; and
  3. The MBA application survey rates. These are rates for 30-year and 15-year conventional loans, 5/1 conventional ARMs, and 30-year FHA loans, published weekly as part of the MBA’s application survey.

Unlike the other surveys, the MBA publishes the “contract rate” and average associated points, along with the “effective rate” adjusted for the impact of points on the average rate. (Freddie Mac obtains the “average contract interest rate, average number of points…that would be quoted to consumers on conventional, conforming first mortgage products.” Bankrate.com does not appear to control for points; the notes on Bloomberg for their 30-year conventional loan rates says that “[R]ates include only 30-Year Fixed Products, with and without points.”)

One impediment to a fair evaluation, however, is that the various published rates are often quite different. The chart below shows weekly prints for the Freddie survey and the Bankrate.com national average, along with the MBA’s contract rate. Click to englarge The difference between the MBA and Freddie rates has averaged about 20 basis points since early 2011, and recently (the week of 8/10/19) reached its widest level over the period of 41 basis points.

To examine this in more depth, we compiled the weekly weighted average rates for 30-year conventional locks in MCT’s client pipelines for the last three weeks and compared them to the published averages over the same time frames.  The results are shown in the accompanying table. Click to enlarge They indicate that over this period the weighted average rates in the pipelines are fairly close to the MBA’s contract rate. While this is too small a sample to constitute a definitive study, it suggests that the MBA contract rate is a good proxy for “average” rates, at least for 30-year conventional loans.

Happy Thanksgiving to all our clients and readers!



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.