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 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.