MBS Weekly Market Commentary Week Ending 4/26/19

Treasuries rallied nicely last week, pushing yields below key thresholds. The 10-year ended the week just below 2.50%, while the rally took the yield on the 2-year to 2.28%, leaving the 2-10 spread at +21.6, its widest level since late November of last year.

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

Also noteworthy was the steepening in the short end of the curve, leaving the 2-5 spread in positive territory (by half a basis point) for virtually the first time in 2019. The last month has also seen an uptick in realized Treasury volatility; the standard deviation of the 10-year yield has moved up about 0.8 basis points per day since mid-March. As the chart below suggests, realized Treasury vol has trended higher since it bottomed out last summer.

MBS performed reasonably well given the decline in rates, as the 30-year current coupon was unchanged in spread to 5-10 interpolated Treasuries. Coupon swaps compressed a bit, which is expected as yields decline, leaving the Fannie 3.5/3 swap narrower by about 5/32s on the week. Conventional and government 3.0s remain the only coupons with special rolls, with the Fannie 3 May/June roll trading more than 1+ special. That roll is also starting to perk up this week, and at this writing (10:00 PT) offered at 3+ ticks; traders short this TBA for May should be wary of the possibility that it might get quite expensive to roll as May notification approaches. (For example, the April/May roll go to almost 7 ticks on April 5th before selling off on 4/8, which was Class A notification for April.)

A few weeks ago we discussed application activity and whether the 1786 print on the MBA’s refi index (for the week ending 3/29) was an aberration or the sign of a sharp uptick in refi applications. The index has dropped steadily in recent weeks, reporting at 1293 for the week ending 4/19 (the last available report). While mortgage rates have ticked higher, the Freddie Mac survey rate is only 11 basis points off its lows. Moreover, the accompanying scatter chart and regression suggest that activity levels are very much in line with their trend vis-à-vis rates, with the 3/29 index representing a short-term blip in activity.

The late March spike in activity was interesting, however, as it was accompanied by a significant pickup in ARM applications. The chart below shows the MBA’s refi and ARM indices since the beginning of 2017. It’s noteworthy that the 3/29 refi spike was accompanied by a big pickup in the ARM index, which reported at its highest level since 2012; in addition, ARMs as a percentage of total apps reached their highest levels since early 2008. The coincidental timing of the spikes in the two indices is curious, and suggests that a short-term promotion was being run by one or more large lenders to market adjustable-rate loan products. Why lenders might undertake this type of initiative is a mystery; it may, for example, be related to a push in non-QM space which showed up in the MBA’s survey data. (The MBA’s methodologies have long been notoriously opaque; for example, we don’t even know what lenders participate in the survey at any point in time.)

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.