MBS Weekly Market Commentary Week Ending 7/29/22

To conclude the 2022 Western Secondary Market Conference this week, Andrew Rhodes took part in a Capital Markets panel along with David Battany of Guild Mortgage, Mike Quinn of PennyMac, and moderator Rob Chrisman of the Chrisman Commentary. The panel touched on many topics, some of which I will recount for you here.

Panelists stressed the importance of the Capital Markets department not as a profit center, but as a conduit to set a price to the field. Yes, the ability to make a gain on sale exists through delivery, specified pools, and other functions, but the purpose of a well run department is to maintain neutrality, manage pull through, and protect margin. Basis risk is as prevalent as it has been in a long time, making both cross hedging and using Treasury options to hedge inadvisable. 

Let’s make no bones about it, we are in a tough environment. Rates were artificially low over the past couple of years due to the Fed’s actions, and there has been a big displacement in the market with the Fed’s presence waning. Even with elevated fixed rates, a flat or inverted yield curve means that creating a market-driven ARM product with appropriate pricing has proven a challenge outside of bank portfolios. 

Little liquidity exists in the 5.5 coupon and nothing is priced above the 6.0 coupon. There is more liquidity in the 3.5 coupon at 94 than the 5.5 coupon at 103, and this lack of premium has made no-cost loans hard to originate. Normally with a premium coupon, the investor believes they will have an above market coupon for years. In this environment, that’s hard to say. The par coupon issue has borrowers paying more points than they are expecting, which has led to higher fallout. A rising rate environment doesn’t necessarily translate to better pull through. On the bright side, the 5.0 coupon can fit up to a 6.125% note rate, so there is some flexibility to cover positions.

The mandatory versus best efforts spread is tight right now, and even with spec opportunities, it is often hard to put spec pricing into ratesheets. Best efforts delivery dominates the non-Agency space, making it critical to constantly evaluate the health of your investors. The PLS market has been especially unpredictable, making hedging hard and best efforts deliveries more appealing. Fortunately, investors aren’t picky about the delivery method, they just want the loans. The non-QM space has been described as a mile wide, but an inch deep. Risk based pricing means granularity has increased over time. More dynamic pricing on the front end can help with things like CRA pickup.

You don’t need to know where rates are headed, but understanding the forces driving the market is important. Slight differences make a big difference to gain on sale. Strong analytics and a robust best execution analysis are always paramount, but especially so in the current market. Having multiple outlets will help you to get the best price on your loan. MCT offers the most receptive loan sale platform in the industry when it comes to adding new investors.

There is no question that margin pressures exist for all companies in the current environment, and the hedge exists as a vehicle to protect margin. Maintain the discipline of your daily hedge. MCT exists to help you manage your interest rate position. We offer a best in class hedge advisory, trading platform, and unrivaled customer service. Support matters. Your needs matter. Call us to talk about liquidity, premium pricing issues, GSE buybacks, or anything else related to the secondary market.

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 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.

MBS Weekly Market Commentary Week Ending 12/23/22

MCT would like to wish everyone a Merry Christmas and Happy Holidays. Talk to close the year has been dominated by the Federal Reserve’s most aggressive policy tightening in four decades and its impact on the economy, and for us the residential housing market.