MBS Weekly Market Commentary Week Ending 7/8/22

Let’s take a minute to look at some silver linings in the mortgage market. The last couple of months have been a volatile (read: unpleasant) time for the industry, with market sentiment torn between pushing yields higher due to Fed rate hikes and falling yields caused by recessionary fears. Originators have seen volumes drop and margins contract, leading to downsizing. We are nearing the cusp of “bad news is good news,” where economic weakness is interpreted as good news for medium-term economic growth because it means the Fed may ease up on the brakes. 

The FOMC minutes from the June 14/15 meeting showed that the Fed is worried most about inflationary expectations becoming entrenched in the economy and the central bank indicated a willingness to cause a recession to defeat inflation. The 2s-10s spread inverted this week, historically an early warning sign of a recession. The biggest mistake, in the Fed’s opinion, would be to fail to restore price stability. The problem for the Fed is that interest rates are still highly negative on an inflation-adjusted basis. So, even though the Fed is being aggressive in hiking rates, overall monetary policy remains highly accommodative.

A primary concern for the MBS market in the second half this year will be the additional net supply thrown onto the market by the Federal Reserve’s change in monetary policy. Expectations are for between $150 and $180 billion in total runoff from the Fed’s balance sheet to hit the market by year’s end, combined with the conspicuous absence of the Desk’s daily MBS purchase operations. Current expectations are for another 75 BPS at the July FOMC meeting, 50 BPS in September, then 25 BPS in November and December. That is still a lot of tightening to go, and since the Fed Funds rate tends to impact the economy with a roughly nine-month lag, we haven’t even begun to feel the impact of the rate hikes we have already seen.

Forgetting the Fed Funds rate for a moment and looking at MBS, the absence of quantitative easing does not necessarily connote “quantitative tightening,” at least until the Fed begins to actively sell MBS. Yes, there is balance sheet runoff from early payoffs, but some of that is being reinvested in MBS and the minutes from the June 14/15 FOMC meeting made no mention of MBS sales. As has been broadly discussed, the Fed is attempting turn down the heat on demand (and the broader consumer economy) without causing undue hardship for firms that rely on mortgage finance.

The drop of mortgage refinancing activity due to higher rates and receding from the en fuego purchase market from the last two years will help ease the flooding of MBS supply. The type of bonds created via refinancing (the 10-year, 15-year and 20-year variety) have predictably dropped a larger percentage than aggregate gross issuance for agency mortgage bonds. Agency mortgage bonds have the advantage over investment-grade corporate bonds of having no credit risk, which in an uncertain economic environment grants it a significant advantage.

Given where rates have headed, many lenders have been exploring new product offerings, including ARMs. We have seen some questions surrounding pricing. Fortunately, issuance is picking up and July is shaping up to be a solid month based upon forward sales. For any secondary marketing concerns or questions you may have, feel free to contact us or reach out to your MCT trader.

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 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 7/1/22

Steady day-over-day TBA hedge flows have included a lot of pair offs as lenders lifted their hedges with the commitment of month-end whole loan sales. FNCL 5.0s have exhibited price appreciation, gaining versus previous closing levels. TBA markets moving higher has driven rate sheet improvement and TBA hedge flows will be much lighter due to the Independence Day holiday. Ginnie Mae issuance for June has closed and reflected slight month-over-month drop.

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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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