FLASH UPDATE: TRV Weekly Commentary

TRV Weekly Commentary
Week Ending 07 Oct 2014

Comment:

The yield curve slope was unchanged as both 5 and 10yr yields fell 5 basis points. The 10yr, currently at 2.39, continues its rally from its mid-September peak given reduced global growth projections from the IMF and the Fed. Volatility continues to increase as market participants expect the Fed to end its MBS purchase program this month. Despite an imminent end to Fed tapering, mortgages kept pace in the rally as performance surpassed that of benchmark Treasuries. Discount coupon performance was 2 ticks better than par and premium coupons this week due discounts having higher spread duration.

The refi index closed up 61 points (5%) as 30yr fixed rate mortgages fell 3 basis points to 4.30. We saw refis as a percentage of loan applications rise to 56.4 percent into the rally. OASs on premium and cuspy IO benchmarks (4s of 10-13 and 4.5s of 10 and 11) increased between 2 and 5 basis points on what investors perceived as a slight uptick in prepayment risk. It may be worthwhile to watch for widening in these benchmark bonds if rates continue to rally. Oppositely, benchmark 3.5 IOs of 10-13 tightened between 7 and 8 basis points as investors continue to reach for yield. IIOs had a great run in September, grinding between 50 and 100 basis points tighter given lower supply, slower seasonals, and a low refi index. Although at local tights, a few dealers justify the current IIO clearing levels.

Spec pool payups were relatively flat despite the rally. The lull in price action precedes prepayment day when September factors are released. Generally, September prints generally came in line with expectations while par and premium speeds came in faster than anticipated. Spec pool payups continue to be cheap compared to their theoretical payups when priced to TBA OAS. Using this analysis, 30yr 5s appear the richest, as loan balance and FICO payups are between 60 and 70% of their theoretical prices.

Noteworthy:

Given this week’s lunar eclipse (and ensuing moon selfies), we thought it would be appropriate to share a fun fact about our celestial neighbor. The moon’s orbit has increased from 14,000 miles to 280,000 miles since formation as it steals a fraction of Earth’s rotational energy.

Regards,

Tradex Global Advisory Services, LLC

investorrelations@thetradexgroup.com 

203-863-1500

@Tradex_Global