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.

 Join Newsletter or Follow MCT on Social Media:

Previous Weekly Market Reviews by Mortgage Capital Trading (MCT)

Sign up for daily mbs market commentary and review previous commentaries by visiting our commentary category page. Join our email list for further MBS market news, subscribe to receive educational articles, whitepapers, relevant updates, and mortgage market commentary. 

MBS Weekly Market Commentary Week Ending 9/23/22

The phrase “Don’t fight the Fed” was first introduced in the 70’s (a lovely time for inflation lovers) and for most of the last few decades, the phrase meant that the Fed has the market’s back and investors are rewarded for keeping their feet on the gas pedal as the Fed injects liquidity, dampens volatility, and drives outsized returns. But fighting the Fed cuts both ways, and Fed officials are now intent on taming prices, even though the economy is already in a technical recession. Investors have been forced to consider their positions accordingly.

MBS Weekly Market Commentary Week Ending 9/16/22

There are the unfortunate costs of reducing inflation (higher interest rates, slower growth, and softer labor market conditions) that will bring some pain to households and businesses, but a failure to restore price stability would mean far greater economic pain. Markets have interpreted recent Fed comments as: “We are going to raise rates higher and keep them there longer than the market is anticipating. People now understand the seriousness of our commitment to getting inflation back down to 2%. If we have a hard landing and cause a recession, so be it.”

MBS Weekly Market Commentary Week Ending 9/9/22

This year’s run up the coupon stack has led to the destruction of both purchase supply and refinance demand, which has drastically reduced prepayment activity. The Fed’s QE4 created a refinance bonanza in 2020 and 2021, but with the Fed leaving the MBS purchase space next week for the foreseeable future, that party is over. The MCT Review this week examines August prepayment speeds that were released yesterday and what to expect for the remainder of the year.

MBS Weekly Market Commentary Week Ending 9/2/22

In addition to raising the overnight Fed funds rate, the Fed is exiting the MBS and security purchase space as it wraps up QE4. The Fed will reduce its asset holdings by not reinvesting the funds received from maturing securities into new securities as it has been doing over the past two years. The MCT Review this week examines the Fed’s plans and the ultimate impact on a volatile bond market.

MBS Weekly Market Commentary Week Ending 8/26/22

This week’s commentary discusses market preparation and reaction to Fed Chairman Powell’s speech in Jackson Hole. As the Fed puts the brakes on the economy, the central bank is willing to let unemployment go up as a trade for getting inflation under control. Rate hikes are expected to continue as the Fed prioritizes driving down inflation rather than economic growth. Read the rest of this week’s market commentary for more information on the Fed and the MBS market.

MBS Weekly Market Commentary Week Ending 8/19/22

Every week the mortgage industry has new headlines. This week saw talk of Wells Fargo scaling back its mortgage division (possibly greatly exaggerated), MBA mortgage applications dropping to a 22-year low, and U.S. retail sales resiliently remaining flat despite a drop in gasoline prices, though the biggest story was Ginnie Mae and FHFA releasing jointly updated seller/servicer requirements.