MBA Mortgage Applications 7/24/13

TRADEX GLOBAL INTERNAL COMMENTARY

MBA reports another weekly decrease in mortgage applications.

The composite index dropped 1.2% on a seasonally adjusted basis from the prior week (the composite covers both refinancing and new purchases). The refinancing component of the composite was down 1%, and the share of applications to the total was 63%. This was unchanged from the prior week, but a long way off from the earlier part of the year when the refinancing component was 90% of total applications. A detail that is of great interest is that the agency mortgage refinancing component was down 12% from the prior week.  We feel this will have a strong positive effect on our agency IO portfolio. I have been talking about this trend for a few months, and believe that we are just about at the end of the greatest refinance wave in history, as HARP and other government programs start to burn out.  Another interesting number this week is that non-agency mortgage refinancing actually rose 2%. The reason for this is that HPA is giving homeowners more equity back in their homes; this equity will enable them to take advantage of lower rates. Overall, the current trends in RMBS, CMBS and IO’s are about as favorable as we have seen them in the past few years. The Liquid Real Estate Portfolio has annualized in the 12% range for the last three and half years, and we expect the IO portion of the portfolio to help generate an even higher return going forward. Keep nimble – Michael Beattie

EXTERNAL RESEARCH COMMENTARY

The total number of mortgage applications filed in the U.S. last week slipped 1% from the prior week, the Mortgage Bankers Association said Wednesday. The market composite index decreased 1.2% on a seasonally adjusted basis from a week earlier, according to the weekly survey covering more than three-quarters of all U.S. residential-mortgage applications. MBA also reported the refinance index fell 1% from a week earlier to reach its lowest level in two years, driven by a 12% decline in the government refinance index while the conventional refinance index rose 2% The seasonally adjusted purchasing index was down 2% from the prior week. A recent run-up in interest rates has curbed some individuals' appetite to buy a new home and reduced the appeal of mortgage refinancing, though in the latest week mortgage rates fell. The share of applications filed to refinance existing mortgages remained unchanged from the prior week at 63%. Adjustable-rate mortgages, or ARMs, decreased to 7% of total applications. The average rate on 30-year fixed-rate mortgages with conforming loan balances slipped to 4.58% from the prior week's 4.68%. Rates on similar mortgages with jumbo-loan balances slid to 4.66% from the previous week's 4.81%. The average rate on 30-year fixed-rate mortgages backed by the Federal Housing Administration fell to 4.28% from 4.38% a week earlier. The average rate for 15-year fixed-rate mortgages decreased to 3.63% from the prior week's 3.7%. The 5/1 ARM average declined to 3.3% from 3.39% a week earlier.

Tradex Global Advisory Services, LLC

investorrelations@thetradexgroup.com 

203-863-1500

@Tradex_Global

Flash Update - Liquid Real Estate Portfolio - 7/24/13

Why some non-agency RMBS and CMBS traders were well prepared for the June selloff in bonds.

Comparing our June returns to the agency mortgage space was a tale of alpha and beta.  Our Liquid Real Estate Portfolio generated alpha while being hedged and lost approximately 1%.  Some mortgage REIT funds delivered a lot of negative beta with double-digit losses.  The selloff in RMBS non-agency bonds was minor as most Subprime, Pay Option ARM or Alt-A bonds are credit sensitive and not interest rate sensitive; they did lose 3-4% in value in June though.  The CMBS market in June was also interesting as bonds sold off anywhere from 4-8 points depending where they were in the capital structure.  The difference in our return and other long mortgage or long fixed income strategies is that we are hedged!  In some cases, we saw our interest rate hedges in June making 1% or more and credit hedges contributing positively in varying amounts.  The large portfolio of IO’s was a positive contributor in some cases, as these securities are very positively convex and tend to appreciate in value as rates are rising.  We believe the IO portfolio is well positioned to see outsized returns in the near and medium-term, while the normalizing of the greatest re-fi wave in history commences.  The outlook is very positive for all  strategies in the Liquid Real Estate Portfolio as fundamentals in both RMBS and CMBS continue to improve, and the higher interest rate environment going forward is positive for the IOs. 

Tradex Global Advisory Services, LLC

investorrelations@thetradexgroup.com 

203-863-1500

@Tradex_Global

Flash Update - Liquid Real Estate Portfolio - US Property "Bad" Loans at 3-Year Low

The delinquency rate for loans in CMBS securitizations has dropped to 7.18%.  This is with the backdrop of improving commercial real estate values and an appetite to lend against the properties in “refinancing”.  According to Fitch, this is a three-year low and a very welcome statistic for our CMBS allocation in the Tradex Global Liquid Real Estate Portfolio.  At the same time, US economic recovery has brightened the prospects for office blocks and shopping malls that are used as collateral in the $600 B market for US commercial mortgage backed securities.  This positive development is in stark contrast to the situation in Europe, where the default rate on European CMBS has doubled so far this year.  The default rate in the US is the lowest since March 2010, when the effects of the Great Recession were piling the pressure on borrowers.  Fitch also estimates that the delinquency rate could fall below 7% when the current pipeline of REO (real estate owned) properties are sold.  Our Fund currently has an approximate 25% allocation to CMBS and we expect that allocation to rise in the near term.  While Europe is far behind the US in commercial property recovery, we see some of the best opportunities in Europe and will slowly have a higher exposure to that region.  While we can expect low double-digit (loss-adjusted) returns in RMBS, we are forecasting mid-to-high teen (loss-adjusted) returns in the CMBS exposure.  We have the expertise of a well-known real estate PE firm helping our CMBS manager discover the fulcrum security in a CMBS deal, allowing us to invest in lower rated mezzanine tranches that others cannot price as well.  We believe that all three strategies in the Tradex Global Liquid Real Estate Portfolio are set up to deliver a better return than the 12% annualized return investors have enjoyed over the 3 ½ year track record.  

Tradex Global Advisory Services, LLC

investorrelations@thetradexgroup.com 

203-863-1500

@Tradex_Global

Flash Update - Short-Biased High Yield Portfolio

June was an exciting month in the high yield market as the 10Y Note rose another 50 bps in yield, while hitting a peak of 2.74%.  This set off alarm bells for HY investors who are long credit and short convexity.  This was merely a warning sign, and in many cases prices have already recovered close to the recent highs.  It can easily be seen in the table below how swiftly losses will come, especially when there are significant negative credit events in the pipeline.  Our Short-Biased High Yield Portfolio focuses on event-driven, vulnerable high yield credits that will likely lose a tremendous amount of value when a negative catalyst becomes apparent.  This fall in bond price will likely be accelerated by any rise in interest rates, which we believe will continue.  Next time, the recovery in price may not be so kind...

Tradex Global Advisory Services, LLC

investorrelations@thetradexgroup.com 

203-863-1500

@Tradex_Global

Flash Update - Liquid Real Estate

We believe prepayments will ‘shock to the downside’ in the 2^nd half of this year.  If the bond market stabilizes in a 2.5% to 3.0% 10-year zone, we believe we no longer need a further sell-off to create sharply slower prepayments for most coupons.  In our opinion, only a strong reversal to lower rates would derail strong performance in the second half of the year for IOs.  If the economy keeps improving (inflation heads higher and/or unemployment heads lower), rates have much more room to go higher from current levels.  Often the biggest returns in the mortgage derivatives market have been made owning IO product as the mortgage market exits a refinancing wave.  It’s been a longer than expected wait, but we’re of the belief that this scenario will continue to unfold in stages in the latter half of 2013 and into 2014.  The charts above show some specific vintage IO performance history.

Flash Update - Short-Biased High Yield

The rally in high yield credit has taken a breather over the past few weeks given a combination of heavy supply, rising rates and weak fund flows.  Today’s (still) record low cost of debt has given companies the incentive to issue debt and increase leverage.  In the past few quarters, we have noticed a general deterioration in credit quality.  You can easily see that debt growth has increased as EBITDA has flattened out in the graph above.  This is a recipe for disaster in some of these highly vulnerable, highly levered, high yield companies that Tradex Global Short-Biased High Yield Portfolio focuses on.  Last twelve month EBITDA growth was down -0.9% in Q1-2013, and was up just under 1% in the prior two quarters.  The end result is that leverage for the median high yield company has risen meaningfully over the last year. 

MBA Mortgage Applications 7/3/13

TRADEX GLOBAL INTERNAL COMMENTARY

Mortgage applications fell 12% last week according to MBA.

The headline is down 12% for all applications, but the real story is a 16% drop in the refinance sector. The share of applications to refinance an existing mortgage decreased to 64%, which was at 90% not too long ago. The new purchase index dropped marginally by 3% as the new higher interest rate had deterred some buyers from buying a new home. The average rate for a 30-year conforming mortgage increased to 4.58%, the highest rate since October 2011. I have been seeing this trend of slower prepayments, and the dealers and the market have finally rewarded those patient IO investors this month. Please expect to see some additional commentary that will be sent out shortly to interested investors in the Tradex Global Liquid Real Estate Portfolio. Keep nimble, and enjoy our great 4^th of July holiday -  Michael Beattie

 

EXTERNAL RESEARCH COMMENTARY

The total number of mortgage applications filed in the U.S. last week fell 12% from the prior week as interest rates jumped to their highest level in two years, the Mortgage Bankers Association said Wednesday. The refinance index decreased 16% for the week ended June 28 from the previous week, according to the weekly survey covering more than three-quarters of all U.S. residential-mortgage applications. MBA also reported the seasonally adjusted purchasing index slipped 3% from a week earlier. Interest rates have increased in recent weeks amid stronger economic data, curbing some individuals' appetite to buy a new home. Mike Fratantoni, MBA's vice president of research and economics, said fewer homeowners have an incentive to refinance at the current interest rates. Refinance-application volume dropped more than 15% last week. The share of applications filed to refinance an existing mortgages decreased to 64%, the lowest level since May 2011, from the prior week's 67%. Adjustable-rate mortgages, or ARMs, increased to 8% of total applications, the highest level since July 2008. The Home Affordable Refinance Program share of refinance applications rose to 34% from 30% in the prior week. The average rate on 30-year fixed-rate mortgages with conforming loan balances climbed to 4.58%, the highest rate since October 2011, from the prior week's 4.46%. Rates on similar mortgages with jumbo-loan balances rose to 4.68%, the highest rate since March 2012, from 4.52% a week earlier. The average rate on 30-year fixed-rate mortgages backed by the Federal Housing Administration increased to 4.27%, the highest rate since September 2011, from 4.2% a week earlier. The average rate for 15-year fixed-rate mortgages climbed to 3.64%, the highest level since July 2011, from 3.55% a week earlier. The 5/1 ARM average rate rose to its highest level since July 2011, jumping to 3.33% from 3.06% a week earlier.