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 yields moved lower last week, reflecting growing concerns over the economic outlook as well as equity market woes. The yield on the 10-year Treasury note declined by 15 basis points on the week, while the 2-10 Treasury spread widened by about 7 basis points to +12 bps. The rally in Treasuries was a bit aberrant compared to other sovereign debt, as yields for the major European countries, as well as Japan, were little changed on the week. The Fed Funds futures market currently projects around a 70% chance of an easing at the next Fed meeting on 10/30, up from less than a 50% market-implied probability at the end of September.read more
Treasury rates dropped last week, reversing the previous week’s selloff and pushing yields significantly lower. The 10-year yield ended Friday at 1.723%, dropping by about 17 basis points on the week, although it remains well above the 1.46% level last seen immediately after the Labor Day holiday. The Treasury yield curve (2-10s) flattened by about 6 basis points to just inside +4 basis points, while the 2-5 spread further inverted to -8.5 basis points. The continued volatility of the market was reflected in the 40-day trailing daily standard deviation of the 5- and 10-year Treasury notes, which reached 6 basis points by Friday, its higher level since mid-2015.read more
Treasury yields shot higher last week, rising by 25-35 basis points to leave the 10-year yield just inside of 1.90%. The Treasury yield curve also steepened noticeably, as the 2-10 year spread widened by almost 8 basis points while the 2-5 year spread, while still negative, improved by about 6 basis points. While other sovereign yields also moved higher, the selloff in US Treasuries was more pronounced; as an example, the spread between the US and German 10-year notes widened by about 20 basis points week/week. Despite the selloff, the Fed Funds futures market continues to trade as if a cut in the target rate is a virtual certainty at the OMC meeting this week, with a projected 95% probability that the target range will move to 1.75-2.0%.read more
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.read more
Treasury rates plunged last week after the announcement of a cut in the Fed Funds target rate on Wednesday was followed by an escalation of the trade fight between the U.S. and China. While the entire Treasury curve rallied, intermediate and long Treasuries had the best performance, with yields dropping between 19 and 22.5 basis points week/week. The rally left the 2-10 year spread at +13.4, its tightest level since last December, while the 2-5 year spread inverted again and closed the week at around -5.5 bps. Money market rates were mixed, however, as 1-month LIBOR was virtually unchanged while SOFR (a market-based overnight rate) went from 2.41% on 7/26 to a high of 2.55% on July 31st (possibly distorted by month-end pressures) to end up at 2.19% on Friday. Overseas rates also plunged, leaving the entire German sovereign curve (including their 30-year bond) at negative yields.read more
The Treasury market meandered around last week, although the week/week changes belied some noteworthy mid-week price volatility. The 10-year note ended the week yielding 2.07%, only about 1.5 basis point higher than its 7/19 close, but the note’s yield ranged from a low of 2.045% to a peak of 2.082%. The yield on the 2-year note was somewhat steadier, although it popped by about 5 basis points on Thursday, leaving the 2-10 year spread just under 2 basis points flatter at +21.7 bps.read more
Treasury yields declined last week, with the week/week change led by the intermediate and long sectors of the market. The 10-year note closed at 2.056%, down about 7 basis points on the week, which left the 2-10 years spread at +23.5 basis points. The drop in the 10-year yield was entirely due to a decline in the 10-year “real” yield, as the 10-year TIP declined by about 8 basis points on the week while the 10-year break-even inflation rate (i.e., the on-the-run minus the TIPS yields) increased by about 1.5 basis points.read more
Treasury yields mostly rose last week, although the front end of the yield curve rallied modestly after fairly dovish testimony from Fed Chairman Powell. While the 10-year yield rose by almost 9 basis points to close the week at 2.12%, the yield on the 2-year note actually declined by 1.5 bps. This left the 2-10 year spread wide by 10 basis points week/week after moving inside +16 bps last Tuesday, before a selloff in the intermediate and long end of the curve later in the week.read more
Intermediate and long-maturity Treasuries continued to rally last week, leaving the yield on the 10-year right at the 2% mark. The rally mainly benefitted maturities longer than seven years, as the 2-year yield only declined by a basis point (versus 5 bps on 10s) which left the 2-10 year spread at +25 bps. The rally incorporated both a lower TIPS break-even inflation rate (with the 10-year B/E ending the week at 1.7%, about 3.5 bps lower) while the TIPS yield itself (a proxy for a “real” 10-year rate) declined by about 2 bps to 0.30%.read more
Bonds continued their rally last week, although the 10-year failed at an initial attempt to break through 2%, closing at 2.056%. The rally was triggered by dovish statements from the Fed’s Open Market Committee that led traders to conclude that a rate cut is almost certain at the 7/31 meeting. (The Fed Funds futures market currently projects at least two rate cuts this year.) The Treasury yield curve (2-10s) ended the week steeper by about 6 basis points, while the 2-5 spread widened by 3 bps to close at +2 bps. Overseas rates also followed Treasuries lower, with the German 10-year ending the week at -0.29%.read more