Yesterday’s anxiously awaited September Payroll Report
shows the change in non-farm payrolls (NFP) was weak at 148k vs 180k
expected. The Treasury curve flattened -8bps in yield on the longer end
as one might have expected. Mortgage yield spreads also tightened about -2
bps versus their hedges yesterday. In terms of price performance, this
equated to discount 30-year mortgages having rallied +30 bps in total return
versus their Treasury hedges yesterday alone!
In total, the 30-year current coupon mortgage rate has
tightened -10 bps in yield versus the treasury curve since the “no taper”
decision by the Fed in mid-September and almost -30 bps since reaching their
widest point in early July, after reacting to the Bernanke statement that
tapering could begin later this year. Clearly mortgages have been on an
torrid run in the 2nd half of 2013. This is positive for our
Liquid Real Estate Portfolio, particularly in the agency IO securities and other agency MBS
relative value trades.
However several countervailing data points from yesterday might need to be considered as well. The August change in NFP was revised
upward by an almost equal amount as what the September NFP missed to the
downside. The headline unemployment rate also ticked downward to 7.2%
from 7.3%. The day-of-tapering will return once again and spreads will
widen again. The net take-away is that the mortgage “basis”, i.e. the yield
spread between mortgages and Treasuries, remains highly data-dependent and range-bound.
We believe there remains excellent opportunity to trade the mortgage basis in
this environment from both the long and the short side.
Tradex Global Advisory Services, LLC
investorrelations@thetradexgroup.com
203-863-1500
@Tradex_Global
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