MBS Weekly Market Commentary Week Ending 5/13/22

We are seeing from our clients that current market roll costs and the ultimate effects on execution are the biggest concerns for secondary marketing heads. Increased roll costs mean there is an increased time value of money, and it is essential to maximize efficiency on commitment periods, especially during certain times of the month. A surfeit of investors allows for them to accommodate and price to a specific number of days when submitting a bid tape as part of the chase for granularity. At the end of the day, shortening that commitment period is the best way for sellers to pick up anywhere from a couple to over a dozen basis points on loan sales.

Pricing deterioration is a direct result of roll costs going up. More volatility over the past several weeks has helped bid ask spreads to expand out, as does illiquidity on higher coupons. A potential need exists to assign trades unless you want more hedge cost based off of those spreads. This should be taken into account when hedging, because this cost will be incurred and needs to be charged to the borrower on the front end. Rolls will eventually contract with more production and liquidity in higher coupons. There is still a lot of inefficiency in those emerging coupons (5, 5.5).

With a lot of 4.5s being traded right now, emerging coupons are still illiquid, but agencies are looking to move up note rate tranches. Fortunately, there is more and more liquidity and production flowing into that way, and we are seeing traction in more liquid higher coupons like 4.5 rolls. Back in March, there wasn’t much of any liquidity in 4.5 and 5 coupons, especially on the Fannie side. On the GNMA side, a 5.25% note rate is as high as you can go to get you in the 4.5 coupon, so there is a lot of cross hedging taking place. For the agencies, keep in mind that there is the maximum 112.5 bps strip deliverability in a 5.5 coupon when you get to a 6.125% note rate or higher. Even with the move up in the market, a lot of the lower coupons trading below par are still being traded as primary coupons (25% or so of production trading in a 3.5 coupon). 

On the back end, when the loan is executed, we have seen quite a few situations where longer commitments are causing clients to leave profitability on the table. Over the last two years, record volumes stretched post-closing and shipping departments thin, and longer commitments (seven days, ten days, or even further) were taken out. Definitely take dynamics into account when doing best execution analysis and make sure to add that spread back in for whatever production you are looking to sell. Investors have different ways of paying up, or not. Regardless, you are going to be better off with a shorter commitment period. You could be missing out on execution if you can deliver within two to four days but took out a 7-day delivery.

What used to be around half a basis point a day in roll costs is now a basis point or more, especially on rates being originated, and in some cases up to 2 bps. That means shortening the delivery window by three days could be a 5-6 bps improvement on the investor bid price. We have seen some clients submitting for 15-day delivery when they could do five or seven days. There is serious pickup that can be achieved with a shorter delivery period. How many days do you need to deliver the file? Closing, funding, and shipping quickly can save you on hedge cost.

Making the loan process more efficient is going to save you bps. Investors are pricing appropriately for elevated roll costs, and those higher roll costs amplify the pick up you can get with a more efficient process and delivery period. All that equates to better execution. Reach out to your trader for any front end pricing questions, lock extension questions, execution on the back end questions, or to have a discussion about the best options for your loan sales.

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 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.

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.