MBS Weekly Market Commentary Week Ending 8/12/22

Last week’s U.S. employment figures pointed to a continued strengthening job market while this week saw a spate of softer-than-expected inflation data, but the 10-year Treasury yield closed each week at the same level. Mortgage rates, however, whipsawed around by 0.25-0.375 percent over the last several trading days, exemplifying the basis risk of hedging a pipeline with U.S. Treasuries. Stating something many of you already know, basis risk is the possibility that the value of two assets hedged against one another will move differently

Economic releases, whether inflation, employment, or GDP growth, directly influence Treasuries, but may not have an instantaneous impact on mortgages. This is what makes it difficult, if not impossible, to hedge a mortgage pipeline with U.S. Treasuries. Treasuries move similarly, but not always the same, to mortgage-backed securities (MBS). There is additional risk in MBS due to unscheduled prepayments of principal due to refinancing, foreclosures, and home sales.

The last few weeks have reminded us that using To-Be-Announced securities (TBAs) is a superior underlying hedging instrument for a mortgage pipeline. Using TBAs, you hedge your loans in the pipeline with the instrument deriving the price of those loans. TBAs are forward contracts meant to offset the gains or losses of the loan price from time of rate lock to final sale for a lender. Using TBAs to hedge the pipeline separates the hedge from the end investor outlet. 

Hedging as a practice is not meant to be a profit center, but rather used to mitigate risk. Implementing an effective hedge strategy with TBAs allows lenders to deliver loans via mandatory loan sales to investors. Instead of locking in with the investor early in the origination process, like with best efforts, a lender is able to run a best execution at the time of sale and select the highest price. Selling loans on a best efforts rather than a mandatory basis is a glorified gamble for capital markets staff. Sure, in a falling rate environment, you are going to record more profit, but any profit you feel like you have left on the table over the past seven weeks would have been more than offset by the losses you took as rates ran up through the first five and a half months of 2022. 

Our experienced hedge advisory allows you to be your most successful. We offer clients more selling flexibility, greater efficiencies, less risk, and the ability to hold loans on the balance sheet longer. Experiencing liquidity issues with higher note rates? BAM Marketplace is the first open, transparent loan exchange, giving you transparency into all available executions, even if you aren’t an approved seller. Make sure your existing investor pricing is strong and competitive. Find buyers that fit the profile of the loans you are originating. As always, contact us if you are looking for a better suite of secondary marketing products or more guidance on how to manage market volatility.

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.