MBS Weekly Market Commentary Week Ending 6/7/19

Treasury yields continued to push lower last week, with the 10-year yield ending the week at 2.083% after renewed concerns over trade spats and a weak Employment report.

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

The 2-year note was the best performer on the Treasury yield curve, as its yield declined by over 7 basis points on the week, leaving the 2-5 sector virtually flat and the 2-10 year 3 basis points wider at +23 basis points.  Even more astonishing were the closing yields on foreign debt; the German 10-year ended the week at -26 basis points, 6 basis points lower on the week.  The Fed Funds futures market now projects an 80% probability of a rate cut by the Fed at the 7/31 meeting, based on the weakening economic fundamentals and dovish comments from Fed officials.

Despite the rally, the MBS sector put in a decent performance.  All major current coupon spreads over Treasuries closed tighter on the week, although these measures can be quite misleading, as the 30-year Fannie and Ginnie II current coupons both use the unreliable 2.5% coupon as an input in the calculations.  (Basically, the current coupon rate is an interpolation of the coupon above and below the “parity” price, or the par value taking factors including the delay days into account.)  Most 30-year coupons had a cumulative duration-adjusted performance pretty much in line with their 10-year hedge ratios, and lower coupons (3s through 4s) managed to outperform the 5-year Treasury, duration-neutral.  Coupon swaps were mostly steady, although the Fannie 4/3.5 swap lost about 3/32s to close at 1 5/32s.

Another milestone in the transition to the Common Securitization Platform (i.e., the Single Security initiative) was reached last Monday, as the first UMBS pools were actually issued.  It’s noteworthy, however, that TRACE data indicates that Freddie Mac Gold TBAs and securities continue to trade.  As noted in an earlier report, many market participants expected Gold trading to die off fairly quickly, as it was unclear that any dealers were going to make markets in the TBA contracts and product once the SSI transition took place and Gold pools could be exchanged into deliverable pools.  It was surprising to see that almost $6 billion in Gold TBAs traded for June and July settlement on Friday.

(Another $4.7 billion in Freddie pools changed hands on Friday, which is assumed to include both legacy Golds and exchanged mirror pools, although FINRA’s reports are not entirely clear on their classifications.)  The continued trading in Golds may reflect the expansion of the Gold/Fannie swaps to levels exceeded the economic value of Golds’ shorter delay; while there’s no “backward exchange” (i.e., exchanging mirror pools for legacy Golds) there may nonetheless be some advantage to trading or holding Golds instead of the mirror pools.

One other development that (despite being irrelevant to the proceedings) was discussed at the Single Security Initiative in March was the relative increase in Gross WACs of conventional pools.  This is clearly evident from examining the WACs of pools issued during three-month periods over the last two years.  The accompanying table shows WACs calculated for Fannie 3.5% and 4% pools issued during the March-May periods in 2018 and 2019. Click to Enlarge The WACs for pools issued this year are 39 and 33 basis points higher, respectively, a development that has clear implications for the prepayment performance of the different vintages.  The expansion in WACs reflects the better economics of “pooling down” into the lowest possible coupon when calculating best execution, leaving the differential between WACs and coupon rates at their widest levels in memory.


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.