MBS Weekly Market Commentary Week Ending 7/1/22

Is there more widening ahead for mortgages? The Fannie Mae 30-year current coupon spread went from +180 BPS in March 2020 to +60 BPS in April 2021, and now sits around +130 BPS. A lot of the widening potential depends on the Fed’s balance sheet, which now totals about $2.7 trillion of agency MBS. The coupons the Fed holds the most of are those that were produced over the past two years: G2SF 2% and 2.5%, UMBS30 2% and 2.5%, and the UMBS15 1.5% and 2%.

After flooding the housing sector with deluge of cheap credit since March 2020, the U.S. central bank is now looking to stem the tide. Daily Fed purchases of agency MBS are now well under $1 billion a day on the latest purchase schedule, a far cry from the record $41 billion purchased on March 27, 2020, and $36.6 billion daily average that month when the central bank ramped up QE4. 2021 saw the central bank take down an average of $5.3 billion per day in agency MBS. The 30-day trailing average of daily purchases is now at $1.3 billion, down from its high of $19 billion seen in April 2020.

The New York Fed’s latest agency mortgage bond purchase schedule takes us one step closer to the central bank allowing mortgages to simply roll off its holdings. Prepayment speeds have gone from a torrent to a trickle as most American homeowners have no refinance incentive. As a result, the runoff from the Fed’s balance sheet is not likely to hit the $35 billion per month cap that will come into effect in September – it is likely to be about $25 billion in roll off per month over the near term – meaning the roll off from the Fed’s balance sheet over the second half of this year should add another $150 to $180 billion in mortgage bond supply.

While any Fed sales of mortgages likely won’t occur until 2023, at the earliest, should the central bank engage in active selling (and that remains undetermined), those coupons mentioned in the opening paragraph are likely to see the most spread widening as a result. This will be the Fed’s third attempt to get back to an all-Treasury balance sheet and another question is how eager will money managers be to take down supply at these spreads? The recent elevated volatility has kept banks on the sidelines.

The FNMA 30-year current coupon spread over the blend of 5-year and 10-year Treasury yields is currently over two standard deviations above its trailing half-decade average. Volatility has re-entered the picture. The problem with inflation remains and slowing money supply growth will further dampen the securities market. More Fed rate hikes are coming through year-end. Year-end forecasts for the Federal Reserve rate hikes increased to 3.50% from 2.75% one month earlier.

While it is a tough time for the mortgage industry, did you really think QE4 was going to end any differently? It was always unlikely that the Fed could pour over $3 trillion of buying power into the mortgage sector and then turn off the spigot without markets reacting adversely. Now that the Fed has removed the training wheels off agency MBS, liquidity needs to develop in higher coupons so that we have better par rates, which will ease pricing issues. Lenders also must focus on cost reduction. 

Caution is warranted. Looking for more tips on how to navigate this period of increased volatility? Hopefully you attended our webinar on Improving Profitability to Counter Market Headwinds. We have also had several client-specific webinars over the last few weeks. Contact us if you are looking for a better suite of secondary marketing products or more guidance on how to manage market volatility.

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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MBS Weekly Market Commentary Week Ending 7/29/22

We saw a noticeable drop off in day-over-day TBA hedge supply after GDP data hit the tape. TBA markets hit recent highs this week, but volatility has not subsited. UMBS has been trading in a wide range as the market is still attempting to make sense of the recent data and overall direction of the market. So much for the dog days of summer.

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MBS Weekly Market Commentary Week Ending 7/22/22

PMI was much weaker than expected with services dropping the most while manufacturing held relatively steady as private sector output contracted for the first time in over two years amid muted client demand. The downturn in output signaled a further loss of momentum across the economy of a degree not seen outside of COVID-19 lockdowns since 2009. The recession talks will be a major focus now.

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MBS Weekly Market Commentary Week Ending 7/15/22

The steady, but lighter TBA supply continued with pricing trending lower, gaining back some ground. Fed comments have helped the short end of the curve recover significantly, and better rate sheets should start hitting the screens. Ginnie Mae issuance remains at a better pace, but the late May/early June sell-off that produced a lock flush is adding to more production. Agency production, especially Ginnie Mae, shouldn’t drop off as much as the general population.

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MBS Weekly Market Commentary Week Ending 7/8/22

We saw steady TBA hedge volumes throughout the week with the heavy day on Wednesday. Purchase activity remains busy and some refinance activity is still present in the wake of the move lower. FNCL 5.0s have been in a tight range and reprices have dropped off. Payroll data has caused more volume to hit the market, but also more servicing selling as lenders adjust their hedges with a move into higher rates.

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MBS Weekly Market Commentary Week Ending 6/24/22

Hedge supply has settled a bit after price movement was relatively contained with FNCL 5.0s moving within a tight range. Less intraday reprices are occuring and steady supply should continue. Be aware of pool submission cutoffs. Ginnie Mae issuance is pretty much closed for the month and it looks like we’ll end lighter versus May, though there will be some that residual will trickle in from custom issuance.

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MBS Weekly Market Commentary Week Ending 6/10/22

We have seen steady day-over-day TBA hedge supply, but some volatility after the ECB announcement. There have been intraday reprices throughout the week as mortgages moved wider and tighter. Rolls closed lower with lighter bank flows not enough to offset real money selling. Spec origination has been busy, highlighted by Class B and G2 custom lists. 15-year pools traded just a touch behind last month’s levels, performing better than 30-years, as investors remain focused on shorter paper. Customer interest is muted ahead of the FOMC next week. Custom pools traded fairly well, mostly holding up to recent clearing levels.

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