MBS Weekly Market Commentary Week Ending 8/12/22

Last week’s U.S. employment figures pointed to a continued strengthening job market while this week saw a spate of softer-than-expected inflation data, but the 10-year Treasury yield closed each week at the same level. Mortgage rates, however, whipsawed around by 0.25-0.375 percent over the last several trading days, exemplifying the basis risk of hedging a pipeline with U.S. Treasuries. Stating something many of you already know, basis risk is the possibility that the value of two assets hedged against one another will move differently

Economic releases, whether inflation, employment, or GDP growth, directly influence Treasuries, but may not have an instantaneous impact on mortgages. This is what makes it difficult, if not impossible, to hedge a mortgage pipeline with U.S. Treasuries. Treasuries move similarly, but not always the same, to mortgage-backed securities (MBS). There is additional risk in MBS due to unscheduled prepayments of principal due to refinancing, foreclosures, and home sales.

The last few weeks have reminded us that using To-Be-Announced securities (TBAs) is a superior underlying hedging instrument for a mortgage pipeline. Using TBAs, you hedge your loans in the pipeline with the instrument deriving the price of those loans. TBAs are forward contracts meant to offset the gains or losses of the loan price from time of rate lock to final sale for a lender. Using TBAs to hedge the pipeline separates the hedge from the end investor outlet. 

Hedging as a practice is not meant to be a profit center, but rather used to mitigate risk. Implementing an effective hedge strategy with TBAs allows lenders to deliver loans via mandatory loan sales to investors. Instead of locking in with the investor early in the origination process, like with best efforts, a lender is able to run a best execution at the time of sale and select the highest price. Selling loans on a best efforts rather than a mandatory basis is a glorified gamble for capital markets staff. Sure, in a falling rate environment, you are going to record more profit, but any profit you feel like you have left on the table over the past seven weeks would have been more than offset by the losses you took as rates ran up through the first five and a half months of 2022. 

Our experienced hedge advisory allows you to be your most successful. We offer clients more selling flexibility, greater efficiencies, less risk, and the ability to hold loans on the balance sheet longer. Experiencing liquidity issues with higher note rates? BAM Marketplace is the first open, transparent loan exchange, giving you transparency into all available executions, even if you aren’t an approved seller. Make sure your existing investor pricing is strong and competitive. Find buyers that fit the profile of the loans you are originating. As always, contact us if you are looking for a better suite of secondary marketing products or more guidance on how to manage market volatility.

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.