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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.
The March FOMC Minutes showed that “many” officials held the view that one or more 50-basis point rate hikes could be warranted. Money market traders are betting on a further 225-basis points of increases this year. The MBS basis ended the week wider with treasuries bear-steepening, amid fresh yield highs across the curve, with 2s/10s accounting for most of the curve steepening.
We’ve seen some price appreciation and a pickup in TBA hedge supply, as well as some reprices for the better start coming through. The issuance number from customs has been bumped up, making the drop month-over-month just over $1.5 billion. Going forward we will likely see a drop of ~1-2 billion per month then a heavier drop as the more recent rate move gets digested through pipelines.
This week was all about a sell-off in the bond market. Let’s look at why that occurred, how the Fed can take action from here, and ways for those in the mortgage space to mitigate risk.
March issuance continues to pace ~1.5 billion behind the pace of February. Intermediate Treasury yields lagged both the short and long end of the curve. The reshuffling of the curve left several spreads inverted.
FNCL 3.0s opened the day at 101-03, hit a high of 101-12+ just prior to 12 noon, and then we drifted lower in the afternoon to close at 101-04. We saw some intraday reprices for the better in the late morning and then some in the other direction later in the afternoon. We are now about 6 ticks lower vs. the Friday close of 101-04 but do not expect much from TBA hedge flows today. March issuance is about ~2.0bln behind the pace of February when you compare the first four business day of March to those of February. The big drop occurred in February and I would now expect the attrition to be a few billion/month.
We’ve seen lighter supply thanks to the Russia/Ukraine headlines. The market has ultimately gained ground with FNCL 3.0s starting at 100-06+ and closing at 100-15. We did see some negative reprices, then the Russia/Ukraine headlines moved the bond market higher into lower yields and that brought better reprices. We currently have FNCL 3.0s at a lower closing level so don’t expect much.
MBS gave back gains from earlier in the week, better sellers and heavy supply pushed the basis down 3-5 ticks with weak demand throughout the session. Afternoon flows skewed towards fast money selling. FNCL 2.5 closed 4 ticks wider @ 99-21+, FNCL 3 also 4 wider @ 102-00+. G2/FN down on the day but fared better than conventional counterparts, 3.5s the only green swap on the stack up 2 ticks on better buying. 15yrs higher vs 30s by 2 ticks, bank flows have been light but steady.