US MBS Agency Performance October 2022: MBS Finishes Weakly after Earlier Impressive Rebound

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Senior RMBS and CMBS Strategist, Yield Book

Just when the MBS Agency market seemed destined for a winning month, Halloween arrived and wiped out those good efforts and another losing month was posted.

A whiff of supply (just $2B), a hint of the Fed (FOMC meeting this week), and fast money took their chips off the table and booked the last of October’s profits. MBS had excelled into late October as historically widening spreads were too good to resist while rates rallies had seemed to settle things. However, the oncoming specter of another rates hike spooked the market and index players failed to show. Spread advantage was -20bps and MTD returns were -4bps (both against riskless Treasuries). 10yr Treasury rates crested to 4.24%, before a late month rally took them 30bps lower, and the 2s/10s curve with it (-47bps net).

Nine (9) of the eleven (11) TBA coupons trade at a discount to par, with only 30yr 6.5%s “quoted” above $103, and 6%s alternately between $100 and $101 on occasion. Markets are being loosely quoted on 7%s, with one FNMA 7% pool being issued. That was for $216,000, not even eligible for the $250, 000 minimum balance required to be TBA eligible/good delivery (WAC was 7.5%, 97% LTV, 1 loan).

On the supply side, Originator selling has sunk dramatically, barely reaching $1.5B on some days ($2.14B per day avg), volleying between 4.5%s, 5%s, 5.5%s, 6%s and 6.5% coupons. Refi activity has fallen to just 28% of overall mortgage applications and prepay speeds have dropped to 6CPR on FNMAs and FHLMCs and 9CPR along GNMAs. Extension risk remains at the top of every bondholder’s list.

Dollar Rolls have been sedate, trading well below carry, with only 6%s and 6.5%s offering any market pop, and GNMA II upper coupons outpacing conventionals. As TBA interest wanes, Spec Pool BWICs heated up a bit, CMO accumulators focusing on 4.5% through 5.5%s for current return aspirations. In fact, most recent CMO deals centered around 5.5% collateral.

MONTH TO DATE; results were steady and fractionally tighter on spread as the backdrop settled in after the first week or two. The 30yr current coupon (par based) rose 23 bps to 5.87%, while comparative spreads were mixed as OAS spreads barely moved at 50.955, ZV spreads firmed -4.9bps to 155.675, and measures against the 5&10yr treasury blend were also flat at 171.623.

CMM100 - MTD Oct '22

YEAR TO DATE results are more dramatic since 2022 commenced; 30yr CC +383bps, OAS +64.57bps, ZV +105.85bps and vs the 5&10yr treasury blend +104.54bps.

CMM YTD 2022

As most investors make the move “up in coupon” (UIC), we thought you’d like to know what that looks like. We employed TBA constituents 30yr FNMA 4.5%s, 30yr FNMA 5.5%s and FNMA 6.0%s in a Yield Book Scenario Analysis shocking the curve. In this case, and with the FOMC November and December meetings looming next, we felt it more apropos to move in +/- 75bp clips in line to popular thinking (for at least one rate hike, anyway). 

As most investors make the move “up in coupon” (UIC), we thought you’d like to know what that looks like.

In the immediate case of the FOMC meeting this week, higher 30yr 5.5%s and 6%s perform better into an assumed 75bps hike, with prices one to two points improved from 4.5%s. Extension risk is muted as well, 0.74 years Eff Dur (5.5%s), and WAL increase 0.48 vs 065 to the lower coupon.

Into a rates rally, and somewhat counterintuitively, lower 4.5s do not dominate as only WALs are less dented while 5.5%s and 6%s hold in on price, yield and effective duration.

Always keep in mind, if you were to swap one versus the other, that fuller 5.5%s and 6%s offer a carry advantage of 1/32nds to 1 7/8ths 32nds above 4.5%s with prepay speeds this muted.

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Originally Posted November 2, 2022 – US MBS Agency Performance October 2022: MBS Finishes Weakly after Earlier Impressive Rebound

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