The
key data out last week was Pending Home Sales for September. It was down
a surprisingly large -5.6% in response to recently rising mortgage rates.
With data such as that on top of the Fed’s September 18th “No
Taper” statement (which they reiterated this past week), mortgage rates have
been falling once again and spreads have continued their relentless tightening
begun in July. They tightened another -2 bps this past week and we expect
this constructive backdrop to continue.
The
Fed’s current QE bias will keep a cap on spread volatility and pressure spreads
even tighter in the near term until a change in direction by the Fed is
evident. This makes for a strong positive environment for the mortgage
basis and relative value trading over the near term. However, a change in
the direction of mortgage spreads is inevitable. Once the Fed signals a
change in course, what we have seen time and again is that the market impact
persists for many months thereafter. As the chart bellows shows,
mortgage spreads since the 2nd quarter of 2012 have been highly
directional and driven by the outlook for quantitative easing. We expect
this trend to continue for the foreseeable future and to provide significant
trading opportunities in the mortgage market.
To
convince yourself that spreads will widen again at some point, one need only
understand that the Fed will soon own a third of the MBS outstanding.
The longer the Fed’s QE program stays in place, the more concentrated their
percentage of the agency MBS market becomes. Once the tapering begins,
their exit - or even simple reduction of their presence in the mortgage market
- will present a long period of ‘directional’ spread volatility which will
represent significant arbitrage-able trading opportunities in the mortgage
market.
Tradex Global Advisory Services, LLC
investorrelations@thetradexgroup.com
203-863-1500
@Tradex_Global
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