Treasuries rallied last week as the U.S.-China relationship deteriorated amid a breakdown in trade talks. The 10-year Treasury closed just over the 2.45% level, with the rest of the curve (except the 30-year bond) moving pretty much in concert.
*The MBS Weekly Market Profile Report corresponds to the commentary below.*
The 2-10 spread remained steady at +20 basis points, while the 2-5 spread remained mildly inverted and the 10-30 spread widened out about 3 basis points. The market continued to rally on Monday morning (5/13) as the rhetoric heated up and the stock markets tanked; this left the 10-year yield below 2.40% and the projected probability (from the Fed Funds futures market) of a Fed rate cut at the 1/29/20 meeting is now at 78% (versus 55% two weeks ago).
MBS were wider versus Treasuries, with the Fannie current coupon spread (over interpolated Treasuries) widening by about 3 basis points on the week. On a duration-adjusted basis, 30-year Fannies and Ginnie IIs lagged their Treasury hedge ratios by a cumulative 4-7 ticks. Coupon swaps were mixed, with lower-coupons swaps (e.g., the 30-year 3.5/3 and 4/3.5 swaps) contracting by 2-4 ticks while higher-coupons swaps (for coupons with prices around 104 and higher) actually improved by a couple of ticks. Class A notification came and went without incident, as fears that the Fannie 3 May/June roll might gap higher failed to materialize. The Freddie Mac survey rate declined by 4 basis points last week to 4.10%; despite declining mortgage rates, the MBA’s refi index remained relatively quiet, rising by less than 1% from the prior week to report at 1238.
Last week marked the shift in the 30-year conventional TBA market to trading the Uniform MBS (or UMBS), as May marked the last month that Freddie TBAs will actively trade. That said, there was a small amount of trading in Gold TBAs for June settlement last week. While the $6-7 billion in reported activity (through TRACE) on May 8th and 9th represented a small percentage (about 2-2.5%) of total MBS trading volumes, the fact that there was any trading at all in Golds was a surprise; the consensus at the last Single Security conference in March was that dealers would not support the Gold market once the UMBS became the front month TBA. Moreover, prior to May 2nd there hadn’t been a single reported trade in Gold TBAs for June settlement since June became the third settlement month after March notification; in that light, there almost certainly weren’t any open Gold TBA positions that needed to be closed out. This may indicate that some dealers will continue to support Gold trading, at least for a few months, even though it’s hard to imagine why anyone would be interested in trading the product. (Anyone owning Gold pools can simply swap them into Mirror pools and deliver them into UMBS TBAs.)
Separately, MCT has updated its reports to reflect the transition from the Fannie/Freddie world to one where UMBS are the principal trading and securitization vehicles for conventional MBS. We have also updated the weekly Market Profile report to reflect the new regime, and (to utilize the additional space) have added a few additional data points. We would appreciate feedback on the data and formatting of the updated report.
We won’t be publishing our regular Monday commentary for a few weeks. Next week we’ll be attending the MBA National Secondary conference in New York, and the following week we will observe the Memorial Day holiday.
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.