Two weeks after
Yellen / FOMC Announcements –
A Look at the Impact on the Mortgage Basis
Since the much anticipated FOMC
meeting on March 19th, Yellen’s first as Chair, the Treasury yield
curve experienced a bear flattening. The
5 Year Treasury Note led the selloff, increasing 22 bps in yield. The selloff was not surprising given that
Yellen conveyed rate increases could begin as early as six months after the
Fed’s bond buying program ceases. Yellen also stated that a potential rate hike
decision would be dependent on a range of economic factors, effectively giving
the Fed more policy discretion. The
mortgage market largely anticipated the FOMC’s decision to cut another $10 bln
per month in bond purchases.
Mortgages performed well against
their Treasury hedges since the announcement (see lower panel of Graph A below)
as spreads tightened. A longer term view in Graph B shows that spread
tightening should be expected as rates rise.
The first half of 2013, however,
was a bit of an anomaly as mortgages underperformed treasuries in a rising rate
environment. The anomaly was driven largely
by mortgage investors preemptively discounting the Fed’s immanent
initialization of Taper and market technical factors.
At this point, the mortgage
market seems to have fully digested the Taper projections. Recent events appear to have confirmed that the
mortgage market has returned to its traditional footing as an excellent
performer in a rising rate environment.
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| Graph A |
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| Graph B |
Tradex Global Advisory Services, LLC
investorrelations@thetradexgroup.com
203-863-1500
@Tradex_Global
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