MBS Weekly Market Commentary Week Ending 5/13/22

We are seeing from our clients that current market roll costs and the ultimate effects on execution are the biggest concerns for secondary marketing heads. Increased roll costs mean there is an increased time value of money, and it is essential to maximize efficiency on commitment periods, especially during certain times of the month. A surfeit of investors allows for them to accommodate and price to a specific number of days when submitting a bid tape as part of the chase for granularity. At the end of the day, shortening that commitment period is the best way for sellers to pick up anywhere from a couple to over a dozen basis points on loan sales.

Pricing deterioration is a direct result of roll costs going up. More volatility over the past several weeks has helped bid ask spreads to expand out, as does illiquidity on higher coupons. A potential need exists to assign trades unless you want more hedge cost based off of those spreads. This should be taken into account when hedging, because this cost will be incurred and needs to be charged to the borrower on the front end. Rolls will eventually contract with more production and liquidity in higher coupons. There is still a lot of inefficiency in those emerging coupons (5, 5.5).

With a lot of 4.5s being traded right now, emerging coupons are still illiquid, but agencies are looking to move up note rate tranches. Fortunately, there is more and more liquidity and production flowing into that way, and we are seeing traction in more liquid higher coupons like 4.5 rolls. Back in March, there wasn’t much of any liquidity in 4.5 and 5 coupons, especially on the Fannie side. On the GNMA side, a 5.25% note rate is as high as you can go to get you in the 4.5 coupon, so there is a lot of cross hedging taking place. For the agencies, keep in mind that there is the maximum 112.5 bps strip deliverability in a 5.5 coupon when you get to a 6.125% note rate or higher. Even with the move up in the market, a lot of the lower coupons trading below par are still being traded as primary coupons (25% or so of production trading in a 3.5 coupon). 

On the back end, when the loan is executed, we have seen quite a few situations where longer commitments are causing clients to leave profitability on the table. Over the last two years, record volumes stretched post-closing and shipping departments thin, and longer commitments (seven days, ten days, or even further) were taken out. Definitely take dynamics into account when doing best execution analysis and make sure to add that spread back in for whatever production you are looking to sell. Investors have different ways of paying up, or not. Regardless, you are going to be better off with a shorter commitment period. You could be missing out on execution if you can deliver within two to four days but took out a 7-day delivery.

What used to be around half a basis point a day in roll costs is now a basis point or more, especially on rates being originated, and in some cases up to 2 bps. That means shortening the delivery window by three days could be a 5-6 bps improvement on the investor bid price. We have seen some clients submitting for 15-day delivery when they could do five or seven days. There is serious pickup that can be achieved with a shorter delivery period. How many days do you need to deliver the file? Closing, funding, and shipping quickly can save you on hedge cost.

Making the loan process more efficient is going to save you bps. Investors are pricing appropriately for elevated roll costs, and those higher roll costs amplify the pick up you can get with a more efficient process and delivery period. All that equates to better execution. Reach out to your trader for any front end pricing questions, lock extension questions, execution on the back end questions, or to have a discussion about the best options for your loan sales.

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.