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.

10-Year Treasury Yield Curve

Compare this chart with the mortgage rates chart to see how the 10-year treasury and mortgage rates are correlated. Read more below to learn how mortgage rates are tied to the 10 year treasury yield. View raw data on U.S. Department of the Treasury website.

 

Mortgage Rates Today

The current MBS daily rates are shown below in this chart for 5/1 Yr ARM, Jumbo 30 Yr, FHA 30 Yr, 15 Yr Fixed, 30 Yr Fixed. Sign up for our MBS Market Commentary to receive daily mortgage news in your inbox.

About the Author

Robbie Chrisman, Head of Content, MCT

Robbie started his mortgage industry career with internships during high school and college at Peoples National Bank in Colorado, and RPM & Bay Equity in the San Francisco Bay Area. After graduating from The University of Texas at Austin with a degree in Finance in 2014, he went to work at SoFi, where he rose to Director, Capital Markets assisting in the creation of SoFi’s residential mortgage division before leaving to work for TMS in Austin, Texas. From there, he went to work for FinTech startup Riivos in San Francisco and now is the Head of Content at Mortgage Capital Trading (MCT) in San Diego.

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Previous Weekly Market Reviews by Mortgage Capital Trading (MCT)

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MBS Weekly Market Commentary Week Ending 3/31/23

The market reaction went a little “too far, too fast” in regard to the Fed policy pivot. We witnessed the coupon stack (i.e., the price spread between TBA coupons) decompress in more than a trivial manner in a short period. However, the primary mortgage market has been largely reluctant to follow the Treasury rally, and mortgage rates have ultimately not dropped by the same amount as Treasury yields.

MBS Weekly Market Commentary Week Ending 3/24/23

The FOMC raised its benchmark rate by 25 basis points to a new range of 4.75%-5.00% on Wednesday, a middle ground policy move made in the hope of tampering inflation without further harming the banking system. The raise marks the 9th consecutive rate hike since the Fed began hiking in May of last year and brings the target fed funds rate range to the highest level since September 2007. While the central bank’s monetary policy has been aimed at correcting inflation, it has also revealed hidden weaknesses (e.g., entities whose balance sheets relied on low interest rates).

MBS Weekly Market Commentary Week Ending 3/17/23

Next week will reveal the Fed’s resolve on continuing to beat the drum on their aggressive inflation fight. The word until now has been that the central bank will keep hiking interest rates until inflation is under control.

MBS Weekly Market Commentary Week Ending 3/10/23

Events this week likely will lead to a higher peak interest rate than investors had been expecting just weeks ago. Central bankers appear worried about a cycle in which workers seek higher pay to offset inflation’s bite, and in turn trigger more price increases. In fact, inflation remains high because people have jobs and earn enough income to cover stubbornly expensive housing costs. Robust hiring is good for the economy and workers, but elevated pay growth puts added pressure on the Fed to bring down earnings. 

MBS Weekly Market Commentary Week Ending 2/10/23

The week after the jobs report is generally pretty data-light, and this week was no exception. With a dearth of data, market movement hinged on “Fed speak” and consumer sentiment. We saw some volatility return to bond markets as investors built in expectations for a more hawkish Fed. As a reminder, the Fed raised its benchmark rate last week to a range of 4.5% to 4.75%. Let’s run through what we’ve learned in the wake of that decision and a robust U.S. payrolls report that took some wind out of investors’ sails that had hopes for rate cuts by summer.

MBS Weekly Market Commentary Week Ending 2/3/23

As strong as economists may have thought the job market was, it’s even stronger. In addition to headline non-farm payrolls in January (517,000) beating estimates by around 300,000, employment numbers were revised higher for the past two months. Yes, a tight labor market is anathema to any sort of quick stop to the Federal Reserve’s rate hiking cycle, but the growth rate in average hourly earnings is declining, which will be welcome news to Fed Chair Powell and his colleagues. There exists a raging debate among economists over whether we’ll need a sharp rise in unemployment to keep inflation low.