By Albert Durso, Senior RMBS and CMBS Strategist, Yield Book
US Agency MBS: Index Soars in January, Asia Buys, FHA loosens LLPAs
U.S. Agency Mortgages had one of their best months ever with Total ROR of +318, after 2022 ended -1,222 (Total ROR). For January excess spread to riskless Treasuries was +46bps vs -353bps for 2022. All-time best excess returns were seen sporadically last year in November (+160) and June (+162bps), however this usually alternated with historically bad months.
Lower coupons provided the fuel to tightening while production coupons battled supply to a standoff, with fuller coupons less stable considering recent FHA LLPA adjustments. With five (5) coupons now trading at a premium to par, “moneyness” could again play a role in overall performance.
U.S. 10yr note yields fell 26bps to 3.55 (3.40% resistance), 2s/10s curve remains starkly inverted but somehow less of a speed bump (-71) until Fed easing ceases. 3m10Y Vols dropped 27.4 bps to <+105 context, underscoring the tranquil backdrop that has aided spread product in recent months.
Source: Yield Book, as at 1 February. See end for important disclosures
Originator supply increased 21% from last month to $1.85 billion per day, catching some market participants off guard. Production coupons continue to be focused along 30yr 5%s and 5.5%s (70%), with 6.5%s and 7%s fading (6.4%). The 30yr primary rate lowered 27bps to 6.13% (FHLMC PMMS).
Duration shedding moves were noticed into the late month uptick to rates, as convexity-related and relative value accounts shifted gears accordingly. Also into the mix of flows was some rare buying in the overnight sessions from Taiwan, taking down the current GN2 coupon (4.5%s and 5%s) in size of a couple of hundred million per session (March settlement, new pool guarantee “stip”).
Scanning this month’s industry pronouncements; a more borrower friendly LLPA grid adjustment loosening requirement for higher LTV/Lower FICO borrowers. FHA reduced the “co-mingling” fees for FN/FH UMBS pools, a puzzling and anti-UMBS move from the outset.
Lastly, the GSEs (FNMA/FHLMC) announced “daily” release of cohort prepays in weekly intervals beginning March 8th.
Market Perspective- Dwindling Industry, Dwindling Supply
Regulatory restrictions have trimmed the market of available borrower options (in the wake of 2008-09 GFC), and the Federal Reserve’s removal helped uncapped interest rates- all contributing to a lower forward technical price level on homes (omitting supply/demand for the moment). The Case Shiller/US 10yr rates table below indicates as much when the 10yr rate crosses the HPI level (as it did last July). A declining home price reduces available homeowner equity and in turn leads to reduced refi activity- something that has been the engine of the MBS issuance and underwriting market these past upcycles.
While the U.S. housing industry faces headwinds (rising rates, declining demand, dwindling equity), so to do those who’ve depended on its foundation.
Mortgage Originators and Servicers are starting to feel the brunt of such headwinds, with less need for a large portion of its workforce. Historically, Mortgage bankers ramp up or overstaff into heady underwriting periods and then commence layoffs (firings) into downturns; now is such a period of downturns.
These downturns will continue to reduce Agency MBS issuance (-51% in 2022, -68% Jan’23/Jan’22) and present an opportunity for tightening MBS spreads (all else being equal).
Source: LSEG Eikon, as at 1 February. See end for important disclosures
MONTH TO DATE; Spreads started out 2023 in strong fashion, with levels firming, rates lowering and MBS rallying. The 30yr current coupon (par-based UMBS CMM) plunged 47 basis points to 4.87%, OAS softened 2.7bps to 12.218, ZV measures narrowed 15.8bps to 115.067 and comparisons to the frequently watched 5&10yr Treasury blend were 14.4bps tighter to +128.654.
Source: Yield Book, as at 1 February. See end for important disclosures.
March 2020-Present: The market is still coming off the historic and Fed induced lower interest rates sparked by COVID measures. 30yr CC levels have moved higher 241bps, narrowing OAS spreads -55bps, ZVs of -18bps, and vs the 5&10yr treasury blend -33bps.
Source: Yield Book, as at 1 February. See end for important disclosures,
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