TRV Weekly Commentary
Week Ending 19 Aug 2014
Week Ending 19 Aug 2014
Comment:
Week-over-week, we saw mortgages
underperform their 10yr hedge by 4-6 ticks largely driven by a risk-off move late
last week on tensions in Eastern Europe and the Middle East. In addition to the risk-off mentality,
issuance picked up as summer originations have made their way into the
secondary market. In conjunction with
the Fed’s taper and higher issuance, we remain neutral/bearish on the basis for
the time being.
The Fed released its July meeting
minutes on Aug 20th and investors looked for indications of policy
change. The tone of the minutes was indeed
more hawkish as “many members noted … that the characterization of labor market
underutilization might have to change before long, particularly if progress in
the labor market continued to be faster than anticipated.” Following the press release, the 10yr sold
off 8+ ticks to yield 2.43. The curve
continues to flatten as we approach the lowest 5-10 spread levels since
December 2008.
This week, the refi and purchase
indices continued to decline, easing fears of higher prepayments. Despite diminished prepayment concern, increased
volatility contributed to wider OASs on production coupon benchmark IOs. For example, FN 4s of 13 were 7 bps wider,
while 2011, 2010, and 2009 vintages were 1, 3, and 7 bps wider, respectively.
Noteworthy:
The GNMA II 3.5 Aug/Sep roll
never converged to the GNMA II 3.5 Sep/Oct roll as we had anticipated. The Aug/Sep roll remained around 7+ while the
Sep/Oct roll has been trading around 10 1/8.
Supply/demand and anticipated prepayment dynamics likely caused the
divergence.
Regards,
Tradex Global Advisory Services, LLC
investorrelations@thetradexgroup.com
203-863-1500
@Tradex_Global
No comments:
Post a Comment