MBS Weekly Market Commentary Week Ending 10/30/2020

The 10-year Treasury yield rose to 0.85%, 5bps higher than start of last week. The 30-year Treasury is currently yielding 1.63%. The Fannie Mae 30-year current-coupon spread to the 5/10-year blend tightened 1bp to +80. Volatility has risen to its highest levels in about six months.

For the week ending on October 23rd, refinance activity increased 2.5%, according to the Mortgage Bankers Association, after the previous week’s 0.2% rise. The refi index stands 80% higher year-over-year. The purchase index decreased 0.3%. The conventional refinance sub-index rose 5.3% while the government sub-index was down 5.0%. VA and FHA refinancing applications fell 10.0% and rose 0.7%, respectively. The average size for a refinance loan increased to $298.1k from $294k. The Freddie Mac 30-year mortgage rate is at 2.80%, another record low. Lenders have the primary/secondary spread at 1.65%, up 50bps year-to-date. Home prices in 20 of the largest U.S. cities rose the most in two years in August as low mortgage rates spurred competition for an increasingly scarce supply of listings, according to Bloomberg.

Cumulative performance of MBS – relative to Treasuries – mostly improved last week. Fannie 30-years outperformed by 5 to 9 ticks on lower coupons, and higher coupons beat by 3 to 6 ticks. Ginnies were stronger as well. Lower coupons were 6 to 14 ticks better than hedges, and higher coupons (aside from the 3.5) were 4 to 5 ticks better. Fannie 15s were generally flat to the 5-year benchmark.

On Friday, the Fed’s aggregate mortgage buying was $4.2b compared to the previous session’s $5.3b, according to New York Fed data. The most heavily purchased today was the 30-year UMBS 2%, for December settle, with $2.7b. In an expected move and keep a lid on interest rates, the New York Fed announced Wednesday afternoon that it will now begin purchasing conventional 30-year 1.5%.

The Fed’s continued commitment to buying Mortgage-backed Securities and Treasuries aids in the stabilization of the MBS market, but Tuesday’s election brings uncertainty. Refinance volumes should remain high into the foreseeable future, given Fed buying and near-zero Fed funds rate remain constant. However, as the current refinance wave shores up the rest of refi-able volume, some analysts predict that the Primary/Secondary spreads narrow on the reduction of margins by additional origination capacity for lenders.

Recent polling has resulted in a blue-wave sentiment that cruxes on a democratic win in the general election, and a blue majority in the house. The yield-curve is currently bear-steepening with contingents on significant fiscal stimulus passing if the blue-wave theory holds true. This narrative poses significant down-side risk for mortgage lenders whose positions have (until recently) benefitted from overweighting long-positions on originations because interest rates could begin to drift upward while MBS prices decrease.

Fortunately, the Fed has maintained that they will continue their buying of MBS and Treasuries at the same pace to maintain the low yields we have been seeing (somewhat implicit yield-curve control). Be wary though, due to a phenomenon known as convexity hedging, MBS have a way exacerbating a sell-off in panicked times as investors look to shorten the duration of their portfolio. Suffice to say, adequately hedging a portfolio of originations is as important as ever right now.

Key events this week:

  • Tuesday: Presidential Election
  • Wednesday: MBA mortgage applications, Fed Meeting
  • Friday: Payrolls