FLASH UPDATE: TRV Weekly Commentary

TRV Weekly Commentary
Week Ending 05 Aug 2014

Comment:

The mortgage basis widened 6 bps last week as Treasuries rallied on continued geopolitical risk.  The street forecasts the basis to widen another 10-12 bps and maintains a tactical short position owing to the Fed’s taper trajectory and weakening rolls.  Basis trades hedged with the 5yr fared substantially worse than those hedged with the 10yr as the yield curve steepened 3 bps last week.  Additionally, premium coupons outperformed discounts, with FNMA 4.5s selling off 1 tick and FNMA 3s selling off 11 ticks vs 5yr hedges.

On the supply side, the 5-day moving average of net origination sits at 1.45 bln and has been ticking upward over the past few weeks.  Summer seasonals and higher rates July’s conclusion partially explain the uptick in origination.  As a case study, 10yr yields closed 11 bps higher on July 31^st as origination came in at 2.2 bln.

Despite lower rates over the week, the refi index closed 5 points lower at 1377 and the purchase index closed 2 points lower at 167.  The rates rally has not been large enough to spur a renewed refi wave.  Furthermore, burnout may be a contributing factor to the decline in the refi index.

Noteworthy:

The FNMA 3.5 roll has come off special as the breakeven finance rate sits at 0 bps at a roll price of 9 ticks and a projected 1M CPR of 3.9.  Be cognizant of recent prepayment prints as they will impact roll specialness: premium specialness will increase from fast prints while discount specialness will increase from slow prints.

Regards,

Tradex Global Advisory Services, LLC

investorrelations@thetradexgroup.com 

203-863-1500

@Tradex_Global