MBS MARKET COMMENTARY
MCT’s Director of Analytics, Bill Berliner, writes a weekly summary of movements in the secondary market. The analysis includes an in-depth view of treasury yields, mortgage backed securities, note rates and more.
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Treasury prices held steady last week, even as equities sank in response to growing pessimism over the economic fallout from the Covid-19 pandemic. The 10-year Treasury yield declined by about 4 basis points week/week to yield 0.644%, while the 2-year yield plumbed its all-time lows to yield 0.147%. The 10-year TIPS break-even rate (i.e., a proxy for projected future inflation) dropped modestly to around 109 basis points (which roughly translates to just over a 1% long-term inflation rate); while very low historically, this measure is still well above its 95 basis point level reached in mid-April, not to mention the 55 bp level reached on March 19th at the height of the crisis.read more
The Treasury yield curve continued to slowly steepen last week, reflecting anxieties over the flagging economy and speculation that the Fed may begin to contemplate negative interest rates. The 10-year note finished the week to yield 0.685%, an increase of about 7 basis points over the previous Friday’s close, while the 2-year note closed at 0.16% after reaching an all-time low of 0.14% on Thursday. On that day the Fed Funds futures market reflected a -0.017% rate at the December 16th OMC meeting, as traders began to speculate what else the Fed might do to support economic activity with a jobless rate approaching 20%.read more
The Treasury market took a breather last week, leaving yields little changed. At 0.614%, the 10-year note’s yield closed a little over a basis points higher than the previous Friday’s level, while the 2-10 spread steepened by about 5 basis points, as the curve “twisted” mildly around the intermediate maturities. With Treasuries settling into trading ranges, their realized volatilities have started to decline.read more
The Treasury yield curve underwent a “twist” last week, as shorter maturity yields rose modestly while yields on longer Treasuries declined. The 10-year yield ended the week at 0.60%, lower by about 4 basis points, while yields on 2- through 5-year notes rose between 1.5 and 2 bps. The 10-year appears to be settling into a trading range of around 0.50-0.80%, while its 60-day standard deviation is also stabilizing at a little over 12 bps per day, and should start declining as the very volatile March sessions start to roll off.read more
Intermediate and long Treasury yields declined last week, as the Treasury market looks to be settling into a trading range after a period of extreme volatility. The 10-year yield dropped by about 8 basis points, leaving the 2-10 year spread narrower by about 6 basis points. The decline in the 10-year yield reflected a sharp decrease in the 10-year TIPS break-even (i.e. the projected future inflation rate), which moved in sympathy with weakness in oil prices.read more
Intermediate and long Treasury yields declined last week, although the extreme volatility in Treasury yields experienced over the last month dissipated a bit. The 10-year Treasury yield ended the week at just under 0.60%, while short yields either closed roughly unchanged (the 2-year note) or rose. (T-bill yields ended the prior week slightly negative, so the increase in the 3-month bill yield to 9 basis points was somewhat welcome.) The back-end rally reflected declining long-term real rates, as the yield on the 10-year TIPS dropped by 15 basis points while the Break-even rate (reflecting expected future inflation) rose by 7 basis points, suggesting that traders are not yet incorporating deflation fears into their thinking.read more
Treasury yields ended the week lower, although prices spent most of the week in negative territory before a big rally on Friday took the 10-year yield to its lowest level since 3/9. With Treasury bills carrying negative yields for much of the week and the 2-year note pegged in place at around 0.25%, the decline in yields was focused in intermediate and long maturities, leaving the 2-10 year spread flatter by about 10 basis points at +43 bps. (However, if anyone in the future cites last year’s mild yield curve inversion as a factor in the recession we’re likely to see later this year, please instruct them on the concept of “social distancing.”)read more
Treasury yields were lower week-over-week, but the apparently modest decline in yields does not begin to describe the volatility that the bond markets underwent last week. The chart below, which shows hourly pricing for the 10-year note from 3/13 through 3/20, indicates that the note’s price traded as high as 108-14 (on Sunday night 3/15 in Asia) and as low as 102-03+ on Thursday morning, traversing roughly a 6 ¼ point range over the course of the week. Not surprisingly, realized volatility continued to surge, with the 40-day daily realized vol on the 10-year closing last week at 12 basis points, triple what it was in mid-February.read more
Treasury yields ended another volatile week mixed, with yields on intermediate and long maturities rising while shorter maturity yields declined. After bottoming out at 0.54% on Tuesday, the 10-year note eventually ended the week yielding 0.96%, although the latter part of the week saw intense intra-day volatility. The rally in the short end of the curve, which pushed the 3mo/10yr spread wider by 40 basis points, likely reflected expectations of a sharp cut in the Fed Funds target rate by the Fed at the 3/18 meeting; the Fed ultimately jumped the gun with a rare (if not unprecedented) Sunday announcement of a return to a 0-25 basis point target. The Fed also announced other measures, including a tepid return of a Treasury purchase program on Thursday and a larger program with the Sunday announcement.read more
Yields around the world headed lower last week, as the powerful fixed income rally picked up steam. The 10-year note ended the week at a new record low yield of 0.76%, dropping by about 38 basis points week/week. The bond markets were boosted by a 50 basis point rate inter-meeting cut in the Fed Funds target, which sharply boosted pricing in the money markets, highlighted by a 78 basis point drop in the 3-month T-bill rate. By Friday’s close, the Fed Funds futures market was projecting more than two rate cuts at the 3/18 meeting, while Monday’s oil-driven rally has pushed the futures market to project the possibility of the 0% target rate seen from last 2008 through 2015.read more