MBS Weekly Market Commentary Week Ending 03/06/2020

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.

 
 

*The MBS Weekly Market Profile Report corresponds to the commentary below.*

The MBS sector was in flux last week, as UM30 2.5s and 3s lagged their fast-shrinking hedge ratios by a cumulative three-quarters to seven-eighths of a point.  Notably, the UM30 3/2.5 swap collapsed to close at ½ point (a 1-1 coupon multiple) while fuller-coupon conventional swaps actually expanded.  The accompanying chart shows the UM30 3.0/2.5 swap along with the 10-year yield, highlighting the strong correlation that the swap has recently exhibited relative to intermediate Treasury yields. Click to enlarge  Ginnies had a decent week, in part reflecting their fairly beaten-down state, with most Ginnie/Fannie swaps improving modestly.  A fair number of rolls ended the week trading special, reflecting both expectations of a further decline in funding rates and, more importantly, a major surge in back-month supply.

Dealers began to trade Fannie 2s last week, and while the coupon remains illiquid trading volumes did pick up.  The table below show Tradeweb’s markets in the coupon on Friday at various times in the day, highlighting the thinness of the market. Click to enlarge Early in the session, for example, the April TBA was quoted in a 1-tick market while the March and May TBAs had bid/ask spreads of 13 and 18 ticks, respectively.  Later in the day, the March and April TBAs traded to wide markets while May had a 1/32nd bid/ask spread.   While it’s unclear exactly how many 2s are being traded, Bloomberg (which only shows a subset of TRACE volumes) indicated that just over $300mm Fannie 2s traded on Friday, versus trading of over $34 billion and $28 billion of Fannie 3s and 3.5s, respectively.  Liquidity will improve if and when daily volumes exceed around $5 billion, or roughly of 3% of total 30-year conventional volumes.

The fast-moving market continues to make pegging market mortgage rates difficult.  The Freddie Mac Survey rate reported at an all-time low 3.29% last week, but since the market rallied further late in the week the MBA 30-year conventional contract rate (for the week ending 3/6) should report lower.  We’re expecting Wednesday’s application survey to report a rate of around 3.20%, if the long-term relationship between the rate and Treasury yields holds, while a 50% increase in the refi index is highly likely.

 

 

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.