MBS Weekly Market Commentary Week Ending 9/6/19

After bottoming out after the Labor Day holiday, Treasury yields rose later in the week on a combination of equity market strength, optimism on renewal of trade talks with China, and a fairly strong Employment report.  The 10-year yield closed 6 basis points higher to end the week at 1.56%, while the 2-year rose by just under 4 bps, leaving the 2-10 spread at +2 bps.  Despite last week’s move (as well as this morning’s continued upward push in rates), the Fed Funds futures market suggests that a Fed rate cut is fully priced in for the 9/18 meeting.  This is meaningful because money market rates remain significantly higher than Treasury yields, as highlighted by the chart below, and is one of the factors that has pushed TBA carry lower (and many rolls into negative territory).  It’s likely that more cuts in the Fed Funds target rate will serve to pressure money market rates lower.

MBS had a strong week, as the 30-year Fannie current coupon spread tightened by 7 basis points.  Measured by duration-neutral performance versus the 10-year, in fact, MBS have performed quite well since late August, as indicated by the accompanying chart.  It shows the cumulative daily duration-neutral performance of UM30 3s versus the 10-year note since the beginning of July.   The chart shows that after peaking in late July, the cumulative relative performance of conventional 3s bottomed out at more than -1 point by August 26th; since then, however, it has bounced back by about 3/8 of a point. Trading volumes in UM30 2.5s has picked up significantly, as shown in the chart below, with over $25 billion of activity in the coupon on Friday.  While it constitutes a relatively small share (between 7-10%) of 30-year conventional activity, trading volumes in the coupon have increased significantly since mid-August.  The coupon’s rolls, which breaks even at around 1/64th, are trading fairly special, which is typically the case when trading volumes in a coupon increase sharply over a short period of time.  (UM30 3s are the most actively traded coupon, constituting 40-50% of conventional volumes over the last few weeks; its Sep/Oct roll is currently trading around a plus special.) While rolls for UM30 3.5s and higher remain in negative territory, a number of Ginnie II rolls are trading special.  Most notably, the Sep/Oct GNII 2.5 roll is almost 7/32nds special, which is not surprising given the illiquidity in the coupon.  However, the Ginnie II 3% and 3.5% rolls are also trading in excess of their economic value, largely because they are also fairly illiquid relative to conventionals.  (Since the beginning of August, for example, the average daily volume for Ginnie 3s is around $16 billion versus $72 billion for conventional 3s.)  Despite the higher carry cost, we don’t recommend switching government hedges to UM30 TBAs at this time.  However, traders should watch the roll markets carefully and consider pushing their Ginnie TBAs shorts to the back months if the GNII 3% and 3.5% Sep/Oct rolls start to heat up.

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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Previous Weekly Market Reviews by Mortgage Capital Trading (MCT)

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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.