MBS Weekly Market Commentary Week Ending 10/26/18

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

Treasury rallied again last week, pushing the yield on the 10-year note to 3.076% on Friday, its lowest level since October 2nd. The rally was spurred by another bout of volatility in the equity markets, as well as nervousness caused by a rash of mailbombs sent to U.S. political figures. The rally in intermediate and long-term Treasuries served to flatten most of the yield curve; the 2-10 spread contracted by about 2 basis points to +27, although the 10-30 spread widened by 5 basis points to +23.5.

MBS have continued to perform poorly last week. The 30-year current coupon spread over 5-10 year interpolated Treasuries widened to +94 basis points; as indicated by the accompanying chart, this represents the widest level for the spread in over a year. (At the beginning of October, the spread was around +80.) Click to Enlarge The widening was due in part to the uptick in market volatility, but realized Treasury volatility remains well below where it was last summer; as the chart below indicates, the daily standard deviation (using a 40-day lookback) for the 5- and 10-year Treasury remains more than a half-basis point lower than it was in late July, when the current coupon spread was below +80. The MBS widening was probably due more to the heightened uncertainty and poor tone in the equity markets than the uptick in Treasury market volatility, even though interest rate volatility is more directly linked to MBS valuations. Click to Enlarge Despite the small respite in rates, the note rates of locks in mortgage pipelines continues to move higher. Using MCT’s client pipeline data and fairly standard slotting metrics, we estimate that around 45% of conventional 30-year locks will slot into Fannie or Freddie 4.5s and another 40% will be securitized into conventional 4s, with 5s comprising the bulk of the remainder (around 12%). 30-year government pipelines are even more heavily skewed toward higher coupons; 46% of these locks would slot into GNII 4.5s, and roughly 25% securitized as GNII 5s. For both conventional and government programs, very few locks (2% and 3%, respectively) would slot into 3.5% coupons, and virtually no 3s will be produced.

It’s interesting that trading activity, as reported by FINRA, does not reflect the production dynamics of MCT’s originator pipelines. The chart below shows percentages of average trading volumes by coupon reported for last week’s activity. Click to Enlarge The TRACE data indicates that trading in 5s comprises 4% and 8% of volumes for 30-year Fannies and Ginnies, respectively, while 3.5s represent 24% and 19% of trading volumes in the two products. Moreover, trading in Fannie and Ginnie 3s still made up 14-15% of 30-year trading volumes despite the aforementioned dearth of production in the coupon. While this activity may represent some investors swapping into higher coupons, it is noteworthy that there was roughly four times as much trading in Fannie 3s as in Fannie 5s and more trading in Fannie 3.5s than 4.5s, despite the disparities in production. Bill BerlinerDirector of Analytics

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.