MBS Weekly Market Commentary Week Ending 10/25/19

Treasury yields continued their relatively slow back-up this week, leaving the yield on the 10-year note at its highest level since mid-September. The 10-year yield has moved about 27 basis points higher since early October, and closed just shy of the 1.80% level. The Treasury selloff also took place amid a backdrop of declining volatility; the 40-day standard deviation of the 5- and 10-year notes’ daily changes has dropped roughly a full basis point since late September. The uptick in rates also left the entire Treasury curve into positive-sloping territory, with the closely-watched 3mo/10-year and 2-year/10-year spreads at +16 and +17, respectively.

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

Fed funds futures still project a 90% probability of a rate cut by the Fed at Wednesday’s meeting, which would leave the range of the target rate at 1.5-1.75%. After the upcoming meeting, however, the market’s projections for Fed policy are cloudy; for the 4/29/20 meeting the market is projecting a 41% chance of no change, a 39% chance of a 25 basis point cut, a 16% probability of a 50 bp cut, and a 4% likelihood of a 25 bp rate increase.

MBS had a decent week, with 30-year UM30 3s and 3.5s outperforming the 10-year by a cumulative 1-3 ticks while 4.5s and higher wound up lagging their Treasury hedge ratios. Ginnie IIs had a relatively strong week, with GNII 3s through 4s outpacing 10s by 3-5 ticks over the last five sessions. The 30-year Fannie (UM) current coupon spread over Treasuries widened modestly versus interpolated Treasuries, while the 30-year Ginnie and 15-year Fannie spreads narrowed by 1-2 basis points. Current-coupon Ginnie II rolls remain a concern, with the GNII 2.5 roll (Nov/Dec) currently trading at more than 6+ (about 5+ ticks special) while GNII 3s are currently rolling around 2 ticks special in the front month.

While most coupon swaps have recently moved in line with their durations, the performance of UM30 2.5s has been erratic, even after trading volumes and liquidity for the coupon have picked up. (Last week, conventional 2.5s comprised just under 7% of all 30-year conventional trading.) The chart below shows both the UM30 3/2.5 and 3.5/3 swaps since early June, along with the yield on the 10-year note. (Note that the wider the coupons swap the worse the relative performance of the lower coupon.) Click to Enlarge The chart indicates that the 3/2.5 swap widened out at the beginning of July even as Treasury yields held steady; conversely, the swap remained roughly unchanged even as the Treasury yield dropped in September before widening out over the past few weeks.

The erratic performance of conventional 2.5s can also be seen by reviewing a scatterchart such as one shown below. Click to Enlarge The chart shows the daily closes for the 10-year Treasury yield on the horizontal axis along with the UM30 3/2.5 swap on the vertical axis since June of this year. The chart can be interpreted as showing a number of different “regimes” for the relationship; the period beginning in early June through mid-July, a second relationship holding between mid-July and mid-September, and then a third regime from mid-September through last week. Moreover, none of the relationships exhibit a strong statistical relationship. The R-square value for the entire series is around 5%, representing a very weak correlation and explanatory power; even the period having the best fit (from 7/3 through 9/12) had an R-square value of 79%, weaker than the 91% for the UM30 3.5/3 swap through the entire 5-month period encompassing 104 observations.

These relationships have a number of implications. As we’ll discuss in a future report, the swap is a key factor driving execution, i.e., what coupon is used as a pricing benchmark by aggregators when pricing loans. (For example, would a 3.625% loan slot into a UM30 3.0 or 2.5?) It also impacts hedging choices, as the decision to short conventional 2.5s (or any coupon, for that matter) is highly dependent on the trader’s confidence in its consistent and relatively predictable performance.


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 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.