MBS Weekly Market Commentary Week Ending 6/14/19

Treasury yields did not change much last week, despite some volatility that briefly took the 10-year yield to 2.15% before closing at 2.08%. The yield curve configuration was also little changed, with the 2-10 year spread moving out by about ½ basis point while 2-5s inverted by a basis point and the 5-30 spread widened by about 3 bps.  The TIPS (inflation-protected) break-even rates, which serve as proxies for expected inflation, declined noticeably last week, with the 5-year break-even contracting by 14 basis points despite a slight uptick in the CPI.

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

The mortgage-backed securities market struggled last week, as both the primary and secondary markets finally responded to the dramatic downtick in rates.  UMBS 30-years closed lower by as much as 9/32s, which resulted in a week/week widening of the current coupon spread (over interpolated Treasuries) by around 12 basis points.  Ginnie IIs had a better week, although the current coupon still widened by about 4 bps to Treasuries.  Coupon swaps were mixed, while Ginnie II/UM30 swaps improved by 4-6 ticks.  The push to sub-4% consumer rates has finally been reflected in application volumes; the MBA’s refi index spiked by almost 47% last week (to 1957, the highest level since November 2016) while the composite index (including both purchase and refi applications) increased by 27%.
The Fannie 3 roll for June spiked to over 7/32s prior to Tuesday’s Class A notification, reflecting technical and timing differences between the sale of pipeline loans and the SIFMA calendar.  This week, the GNII 3 roll is also creeping higher, ending the week almost 4/32nds special.  Rolls for a particular coupon can trade erratically when production shifts, and the push lower in rates is creating a lot of back-month selling in conventional and government 3%s that, along with the need to cover June shorts, has pushed the rolls wider.

In addition to reducing expected pipeline pullthrough rates, traders have also had to adjust to declining MBS durations due to expected increases in prepayment speeds.  The accompanying table shows the hedge ratios relative to the 10-year Treasury for Fannie (i.e., UM30) 3s through 4s since early May.   (The hedge ratios reflect the coupons’ dollar durations divided by the dollar duration of the 10-year note.)  The shortening of hedge ratios for Fannie 3.5s and 4s is particular striking, and has implications for both hedging tactics and relative performance calculations.  (For the latter, note that an 8/32nd drop in the price of the 10-year note would have implied a duration-neutral decline of 4+ ticks on Fannie 3.5s on May 10th but only a 3/32nd drop in price on Friday.)

The drop in rates and increase in refinancing activity has also created an increased sensitivity on the part of investors to prepayment exposure, which in turn is reflected in payups for loan attributes (such as pools with smaller loan balances) that historically exhibit less responsiveness to refinancing incentives.  (For example, the pay-up for Fannie 3.5s with maximum loan balances of $150K has increased from around ¾ of a point on May 10th to almost 1 ½ points last Friday.)  One side effect of higher payups is that more such pools are traded in the specified pool market instead of being delivered into TBAs.  This results in the TBA populations being increasingly “adversely selected,” i.e., comprised largely of pools with the least favorable prepayment characteristics.

This in turn means that the durations of TBAs (or, more accurately, the pools that are expected to be delivered against TBAs) has shortened relative to the “new-production” cohort, which is assumed to include all recently-issued pools.   The accompanying display (from Bloomberg’s model) indicates that the duration (i.e. the OAD) of TBA-deliverable Fannie 3.5s is about 14% shorter than that of the entire new-production cohort for the coupon.   (Bloomberg refers to the assumed TBA population as the “worst to deliver” or W2D.)  This means that traders and secondary managers need to identify and specify the applicable cohort for a particular coupon in order to obtain its most meaningful risk metrics.

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.