MBS Weekly Market Commentary Week Ending 5/31/19

A lot has changed since our last update in mid-May. The 10-year Treasury yield closed on Friday at 2.125%, 27 basis points lower than its close on 5/17 and more than 110 bps lower than at the cycle highs in early November.

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

The yield on the 2-year note plunged by 14 basis points on Friday to 1.92%, almost 50 bps lower than the Fed Funds Effective Rate; this pushed the 2-10 year spread back out to +20 and the 2-5 year spread back to -1.  Fed Funds futures have priced in a Fed rate cut as soon as at the upcoming 7/31 meeting; as the table from Bloomberg indicates (image below), the market is projecting more than a 50% probability of an easing in July and a 93% likelihood of a move by October. Source: Bloomberg The magnitude of the late-May rally has made MBS performance tough to gauge.  The 30-year Fannie and Ginnie current coupon spreads (over interpolated Treasuries) actually tightened last week, but that was likely distorted by the rally, which pushed the prices of Fannie 3s into the mid-pars.  (This means that the current coupon rate is interpolated from prices for Fannie 3s and 2.5s, not the most liquid or reliable measure.)  The 5-day cumulative under-performance of mid-coupon Fannies and Ginnie IIs versus their 10-year hedge ratios has ranged from around 6-13 ticks, and most coupon swaps weakened by around 10/32s.  Dollar rolls remain fairly weak, pressured by the combination of higher dollar prices and relative high funding rates.

Consumer mortgage rates have declined with the drop in yields, leaving the Freddie Mac Survey rate below 4% for the first time in roughly 1 ½ years.  While anecdotal evidence suggests that refinancing activity has picked up, it has yet to show up in the MBA’s refi index, which remains at tepid (if not depressed) levels.  The accompanying chart will give some context; it shows the refi index along with the Freddie Mac survey rate in reverse scale.  Defining a “refi wave” as sustained prints for the refi index of over 2,000, the chart suggests that while a sub-4% rate will give activity levels a boost, we’re unlikely to see a major spike in refi applications in the current rate regime.  Click to Enlarge The one factor that might actually trigger a refi wave at current rate levels would be if home price appreciation gave significant equity to large numbers of “underwater” homes as well as properties with minimal equity.  With most home price gauges up around 11-12% since early 2017, this is probably unlikely; it depends on whether large numbers of borrowers with relatively high rates were locked out from refinancing during the last Brexit-induced trough in rates during the summer of 2016.

On another note, today (6/3) marks the first day of issuance of conventional MBS under the Single Security (i.e., UMBS) umbrella.  While the transition has been smooth so far, some observers have wondered whether liquidity will be impaired by the conversion.  (See, for example, a Bloomberg story entitled “A $4 Trillion Mortgage Bond Fix Has Some Skeptics on Wall Street;” as one observer noted, “it already was the most liquid market in the world….what are they trying to fix, exactly?”).  The accompanying chart indicates that conventional trading volumes have remained fairly steady while maintaining their cyclical monthly pattern.  (Keep in mind that trading began to transition in March, and the UMBS became the front-month TBAs after May notification.)  Click to Enlarge While it’s unlikely that market illiquidity will result from prepayment differentials (especially in light of the new FHFA rules issued last spring), an initiative to remove Fannie and Freddie from conservatorship could result in a fragmented TBA market if investors viewed the two entities as having different degrees of creditworthiness.  In this light, the suggestion by the new Director of the FHFA, Mark Calabria, that Freddie and Fannie could be separately withdrawn from conservatorship is risky and ultimately unlikely to occur.


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 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.