MBS MARKET COMMENTARY
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Previous Weekly MBS Market Commentaries
Hedge supply has settled a bit after price movement was relatively contained with FNCL 5.0s moving within a tight range. Less intraday reprices are occuring and steady supply should continue. Be aware of pool submission cutoffs. Ginnie Mae issuance is pretty much closed for the month and it looks like we’ll end lighter versus May, though there will be some that residual will trickle in from custom issuance.
We have seen steady day-over-day TBA hedge supply, but some volatility after the ECB announcement. There have been intraday reprices throughout the week as mortgages moved wider and tighter. Rolls closed lower with lighter bank flows not enough to offset real money selling. Spec origination has been busy, highlighted by Class B and G2 custom lists. 15-year pools traded just a touch behind last month’s levels, performing better than 30-years, as investors remain focused on shorter paper. Customer interest is muted ahead of the FOMC next week. Custom pools traded fairly well, mostly holding up to recent clearing levels.
MBS have moved tighter in the face of higher volatility, as well as a pickup in demand. The basis is also tighter across the stack with 3.5s best. Spec pool origination volume has been very strong, with more cash window and bank serviced Class A pools trading. Trading levels remain elevated at significantly better levels than last month, better by a couple ticks across the board. Custom pool loan balance 4s are starting to lag a bit compared to 4.5s and 5s.
We’ve seen a slight uptick in TBA hedge supply as originators continue to hedge their pipelines before the upcoming long holiday weekend. Price appreciation triggered a bevy of reports of positive reprices and TBA supply activity should continue before quieting down. Better buyers of 4/4.5s helped ratchet mortgages tighter and ultimately ~1-2 ticks wider vs hedges. Banks flows remain muted and focused on shorter duration. Pools traded well as origination trading levels continue to push higher, aided by a sharp rally. Even with clearing levels several ticks higher than they were a week ago, spec valuations remain attractive and customer demand has been strong.
FNCL 4.5s are up versus earlier lows and we’ve seen steady but lighter volumes in the TBA space coming off a big pickup. We’ve also seen TBA appreciation as the bond market rallied, easing some urgency to lock loans. GNMA issuance is expected to end lighter versus April, but the gap appears to be narrowing. The MIP loan package cutoff for the month is coming, though we should be pretty close to that $48 billion figure in April.
Origination volume has been just short of Fed purchases, and the Fed’s biggest purchases are in 4s. The Fed plans to conduct approximately $16 billion in its reinvestment purchase operations over the next two weeks. Secondary selling has come from a mix of MMs and HFs. Notable BWICs include more than $69 million FN/FR 30yr Semi-Seas Investor 2.5s, more than $17 million G230 Seas Mixed Spec 4.5/5.0, and more than $9 million G230 MJM 2.0-4.0.
30-year coupons have seen every coupon but the 1.5% exhibit a speed decrease, with the 3.5% and 4% dropping by a quarter percent. Only the 2% through 4% coupons have outstanding float above $100 billion. The 1.5% through 2.5% coupons are all paying less than 10 CPR, the 4% through 5% are paying faster than 20. With the current 30-year conforming fixed rate at 5.53% as of Thursday’s close, UMBS 30-years have no refinance incentive.
This week saw an uptick in TBA hedge volumes and better pricing. Given that FNCL 4.0s have traded in a narrow range and rate sheets have been going out at morning highs, there have been fewer reports of negative reprices to low levels than in previous weeks. The Ginnie Mae spec pool issuance number has increased just a little bit due to customs flowing through the systems, exceeding the March totals.
We’ve seen lighter TBA supply as the market sells off into higher rates. We’ve seen reprices with the Fed all but confirming the 50 basis points hike for May. Performance on the stack has been materially weaker and coupons have been framed wider, 4.5s and 5s best. 15-years are outperformed 30-years by 2-3 ticks with steady bank buying of the sector. In major pools, 20-years are mostly higher across the board while jumbos were better than the widest levels seen a week or so ago but well below prints from last month.
MBS spreads continue to widen, along with bid-ask spreads in the TBA market. This has made the TBA market more illiquid than usual, which is having an impact on front-end rate sheets. Bid-ask spreads have increased from about 1 tick to 10 ticks, an increase of nearly 30 basis points.