MBS Weekly Market Commentary Week Ending 6/28/19

Intermediate and long-maturity Treasuries continued to rally last week, leaving the yield on the 10-year right at the 2% mark. The rally mainly benefitted maturities longer than seven years, as the 2-year yield only declined by a basis point (versus 5 bps on 10s) which left the 2-10 year spread at +25 bps. The rally incorporated both a lower TIPS break-even inflation rate (with the 10-year B/E ending the week at 1.7%, about 3.5 bps lower) while the TIPS yield itself (a proxy for a “real” 10-year rate) declined by about 2 bps to 0.30%.

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

Mortgage spreads and price performance lagged last week.  The 30-year Fannie Mae current coupon spread over Treasuries widened by about 4 bps, while lower Fannie coupons (i.e., 3s and 3.5s) lagged the 10-year on a duration-adjusted basis by about 4/32s.  30-year Ginnie IIs had a more varied performance; while 3s lagged the 10-year by 4/32s, 3.5s managed to track the 10-year.  Coupon and product swaps were little changed.  The Fannie (UM30) 3.5/3 swap narrowed by about 2/32s, while the 4/3.5 swap widened by a tick; the biggest mover in GNII/FN swaps was in 3.5s, which widened by 3/32s.

Dollar rolls ended the week mixed, with several notable developments.  Both UM30 and GNII 3% July/August rolls closed special, with the GNII 3% roll (at over 4/32s special) showing signs of blowing out prior to July notification on 7/18.  Fannie 3s and GNII 3.5s are both rolling about 1+ special, while a number of fuller coupon rolls (e.g., Fannie 4s and higher) closed the week in negative territory.  As discussed last week, negative rolls reflect their high dollar prices, fast expected prepayment speeds, and high money market rates, which remain well above short-term Treasury yields.

The MBA’s refi index rose by 3% for the week ending 6/21 to close at 1949, a solid number but still well below what is considered a “refi wave.”  (The index’s recent peak was at 2843 in July of 2016, during the post-Brexit rally.)  While the increase in refinancing applications reflected declining mortgage rates, it’s unclear where mortgage rates have actually been quoted through much of June.  For example, there has been a fairly noticeable discrepancy between the two major 30-year conventional indicators, the Bankrate.com national average conventional rate and the Freddie Mac survey rate.  As indicated by the accompanying chart, the weekly Freddie rate has been as much as 18 basis points lower than the Bankrate average since Memorial Day of this year.  (By contrast, the Bankrate average was significantly lower than the Freddie survey rate for much of 2018.)  Click to Enlarge The collective MCT pipelines offer some insights into the question of where 30-year conventional locks are actually being taken.  The weighted average note rate associated with locks taken over the last 15 days of June was 4.07% for 30-year conventionals (and 3.93% for 30-year government loans).  In addition, the chart below gives an interesting picture of recent lock activity for MCT’s clients.   A large portion of 30-year conventional locks added to the pipeline over the last 15 days have had 3.875% and 4% rates, with a smattering of loans at both lower and higher rate levels.  This suggests that the higher Bankrate indicators have probably been more representative of the market than the Freddie rate; this in turn may indicate that the recent decline in the Bankrate average may portend a broad uptick in refi activity and the MBA application indices.
Click to Enlarge Interestingly, the graph also indicates that the 30-year government locks in MCT’s client pipelines display a broader dispersion of rates; for example, less than half of the balances of loans in client pipelines have rates between 3.75% and 4.25%.  If this is representative of the overall government market, the large amount of recent locks with low note rates (e.g., between 3.5% and 3.75%) is being reflected in the specialness of the GNII 3 July/August roll, where hedging and selling activity is pushing down the back-month price and expanding the roll’s price.

We will skip next week’s commentary due to the holiday-shortened week; wishing a Happy Independence Day holiday to all clients, readers and friends.

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.