MBS Weekly Market Commentary Week Ending 6/7/19

Treasury yields continued to push lower last week, with the 10-year yield ending the week at 2.083% after renewed concerns over trade spats and a weak Employment report.

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

The 2-year note was the best performer on the Treasury yield curve, as its yield declined by over 7 basis points on the week, leaving the 2-5 sector virtually flat and the 2-10 year 3 basis points wider at +23 basis points.  Even more astonishing were the closing yields on foreign debt; the German 10-year ended the week at -26 basis points, 6 basis points lower on the week.  The Fed Funds futures market now projects an 80% probability of a rate cut by the Fed at the 7/31 meeting, based on the weakening economic fundamentals and dovish comments from Fed officials.

Despite the rally, the MBS sector put in a decent performance.  All major current coupon spreads over Treasuries closed tighter on the week, although these measures can be quite misleading, as the 30-year Fannie and Ginnie II current coupons both use the unreliable 2.5% coupon as an input in the calculations.  (Basically, the current coupon rate is an interpolation of the coupon above and below the “parity” price, or the par value taking factors including the delay days into account.)  Most 30-year coupons had a cumulative duration-adjusted performance pretty much in line with their 10-year hedge ratios, and lower coupons (3s through 4s) managed to outperform the 5-year Treasury, duration-neutral.  Coupon swaps were mostly steady, although the Fannie 4/3.5 swap lost about 3/32s to close at 1 5/32s.

Another milestone in the transition to the Common Securitization Platform (i.e., the Single Security initiative) was reached last Monday, as the first UMBS pools were actually issued.  It’s noteworthy, however, that TRACE data indicates that Freddie Mac Gold TBAs and securities continue to trade.  As noted in an earlier report, many market participants expected Gold trading to die off fairly quickly, as it was unclear that any dealers were going to make markets in the TBA contracts and product once the SSI transition took place and Gold pools could be exchanged into deliverable pools.  It was surprising to see that almost $6 billion in Gold TBAs traded for June and July settlement on Friday.

(Another $4.7 billion in Freddie pools changed hands on Friday, which is assumed to include both legacy Golds and exchanged mirror pools, although FINRA’s reports are not entirely clear on their classifications.)  The continued trading in Golds may reflect the expansion of the Gold/Fannie swaps to levels exceeded the economic value of Golds’ shorter delay; while there’s no “backward exchange” (i.e., exchanging mirror pools for legacy Golds) there may nonetheless be some advantage to trading or holding Golds instead of the mirror pools.

One other development that (despite being irrelevant to the proceedings) was discussed at the Single Security Initiative in March was the relative increase in Gross WACs of conventional pools.  This is clearly evident from examining the WACs of pools issued during three-month periods over the last two years.  The accompanying table shows WACs calculated for Fannie 3.5% and 4% pools issued during the March-May periods in 2018 and 2019. Click to Enlarge The WACs for pools issued this year are 39 and 33 basis points higher, respectively, a development that has clear implications for the prepayment performance of the different vintages.  The expansion in WACs reflects the better economics of “pooling down” into the lowest possible coupon when calculating best execution, leaving the differential between WACs and coupon rates at their widest levels in memory.

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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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.