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.

 Join Newsletter or Follow MCT on Social Media:

Previous Weekly Market Reviews by Mortgage Capital Trading (MCT)

Sign up for daily mbs market commentary and review previous commentaries by visiting our commentary category page. Join our email list for further MBS market news, subscribe to receive educational articles, whitepapers, relevant updates, and mortgage market commentary. 

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.