Treasury yields declined last week, with the week/week change led by the intermediate and long sectors of the market. The 10-year note closed at 2.056%, down about 7 basis points on the week, which left the 2-10 years spread at +23.5 basis points. The drop in the 10-year yield was entirely due to a decline in the 10-year “real” yield, as the 10-year TIP declined by about 8 basis points on the week while the 10-year break-even inflation rate (i.e., the on-the-run minus the TIPS yields) increased by about 1.5 basis points. Overseas yields also moved lower; the German 10-year yield declined 12 basis points to -0.33% (!), while the French 10-year yield also moved into negative territory, ending the week at -0.07%.
*The MBS Weekly Market Profile Report corresponds to the commentary below.*
Overall MBS spreads were roughly unchanged on the week, with the Fannie current coupon spread over interpolated Treasuries declining by less than a basis point. Duration-adjusted performance was biased in favor of lower coupons, especially in the Ginnie sector, where Ginnie II 3s and 3.5s outperformed their 10-year hedge ratios by 7 and 6 ticks on the week, while fuller coupons such as GNII 4s and 4.5s lagged by 2/32s and 5/32s, respectively. Thursday’s Class C notification saw the GNII 4 roll spike to just under a quarter-point, perking up after Class A notification on July 11th, as shown in the chart below. 
Click to Enlarge Coupon swaps were compressed by the strong performance of lower coupons, while GinnieII/Fannie swaps were mixed; the 3% and 3.5% widened by 3-5 ticks while the 4.5% swap deteriorated by almost a quarter point.
The Freddie Mac survey rate reported at 3.81% last week, while the MBA’s refi index printed at 1827, a 1.5% gain over the prior week’s report (which arguably was distorted by the Independence Day holiday). The accompanying scatterchart, which compares the refi index to the Freddie Mac survey rate since early 2015, indicates that while the index at a sub-2000 level is not yet indicating a “refi wave,” it suggests that refi activity (as indicated by the red box) is in line with its recent history at the current level of 30-year mortgage rates. It’s noteworthy that the last time the survey rate was in the 3.75% neighborhood rates were rising rapidly after the election; the last time rates were trending lower to the 3.75% area (the week of 2/4/16) the index was coincidentally also at 1827. 
Click to Enlarge One other interesting development is the relatively high level of ARM rates, at least for the average rate reported by vendors such as Bankrate.com. The accompanying chart indicates that the reported national average 7/1 ARM rate is currently about 14 basis points higher than the 30-year fixed rate. This is quite unusual; the two rates were inverted during the financial crisis as well as briefly in 2012, when fixed rates plunged once the Fed began buying large amounts of fixed-rate MBS. 
Click to Enlarge
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.
