Treasury yields ended another volatile week mixed, with yields on intermediate and long maturities rising while shorter maturity yields declined. After bottoming out at 0.54% on Tuesday, the 10-year note eventually ended the week yielding 0.96%, although the latter part of the week saw intense intra-day volatility. The rally in the short end of the curve, which pushed the 3mo/10yr spread wider by 40 basis points, likely reflected expectations of a sharp cut in the Fed Funds target rate by the Fed at the 3/18 meeting; the Fed ultimately jumped the gun with a rare (if not unprecedented) Sunday announcement of a return to a 0-25 basis point target. The Fed also announced other measures, including a tepid return of a Treasury purchase program on Thursday and a larger program with the Sunday announcement.
*The MBS Weekly Market Profile Report corresponds to the commentary below.*
The accompanying chart shows that the 40-day standard deviation of the 10-year note has roughly doubled over the past few weeks; while the level of volatility is not unprecedented the speed at which volatility has spiked is eye-catching. Click to enlarge (The measure, based on closing yields, also doesn’t take into account the 2-4 point intra-day moves in prices experienced last week.)
MBS endured a very rough week, with virtually all coupons closing lower. Even with a strong session on Friday, liquid MBS coupons trailed their Treasury hedge ratios by between 5/8 of a point (UM30 3s) and roughly 1 5/8 points (GNII 2.5s). The Fannie current coupon spread over interpolated Treasuries gapped wider, ending the week at +153 basis points, its widest level since mid-2011. The Ginnie II current coupon spread also gapped wider, and ended Friday almost 70 basis points wider since mid-February.
Coupon swaps mostly expanded, with the UM30 3/2.5 swap (which ended the prior week at 16/32s, a highly unusual 1x multiple) moving out by ¾ of a point. UM30 2.5s now dominate trading activity, comprising in excess of 40% of all 30-year conventional activity; while there was some trading in Fannie 2s activity levels are small (less than $1 billion daily) and both pricing and liquidity remains erratic. Bid/ask spreads across the sector were generally wider, and in some relatively illiquid coupons screen prices were unreliable.
The Fed’s Sunday surprise included a program to purchase at least $200 billion in MBS over the next few months, and will also continue to reinvest principal runoff in MBS. (With the refi index more than doubling since the beginning of February, they should have a lot to reinvest.) Aside from pushing MBS sharply tighter this morning (Monday 3/16), the Fed’s actions also put additional pressure on dollar rolls; traders are anticipating that the bulk of their purchases will be in the front month, while the deluge in supply is concentrated in May and later settlements. Most notably, the Ginnie II 2.5 roll has moved out to an 11 ¾ tick offer, while even the UM30 2.5 roll is currently almost 4/32s special.
Good luck…and please stay healthy.
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.