TRV
Weekly Commentary
Week Ending 2 July 2014
Week Ending 2 July 2014
Comment:
Week-over-week, the mortgage basis widened 3 bps on heavier supply and month-end selling by money managers, hedge funds and REITs. While Fed purchases were $2.2 bln higher this week ($8.7 bln vs $6.5 bln last week), heavier supply and month-end selling drove the basis wider. Discount mortgages performed worse than premiums owing to higher rates. In addition, we saw 10 year Treasury bond yields sell off 6 bps, providing extra return for those hedging with the longer bond. The basis ended 8 ticks wider for FNMA 3s vs 5 year Treasuries, while FNMA 4.5s improved 2 ticks vs the same hedge. We remain neutral on the basis in the near-term and look for short-term trading opportunities if volatility increases. We await tomorrow’s change in non-farm payroll to seek such opportunities.
Week-over-week, the mortgage basis widened 3 bps on heavier supply and month-end selling by money managers, hedge funds and REITs. While Fed purchases were $2.2 bln higher this week ($8.7 bln vs $6.5 bln last week), heavier supply and month-end selling drove the basis wider. Discount mortgages performed worse than premiums owing to higher rates. In addition, we saw 10 year Treasury bond yields sell off 6 bps, providing extra return for those hedging with the longer bond. The basis ended 8 ticks wider for FNMA 3s vs 5 year Treasuries, while FNMA 4.5s improved 2 ticks vs the same hedge. We remain neutral on the basis in the near-term and look for short-term trading opportunities if volatility increases. We await tomorrow’s change in non-farm payroll to seek such opportunities.
While implied volatility is still
low, there was a 6 bp uptick in 1M x 10Yr implied swaption volatility. Selling volatility at these low levels is questionable. Historically, when volatility has fallen to these levels, a significant widening event often follows. Moreover, trading volumes are
down 40% year over year, which could result in an oversized widening once
technicals turn negative. Market technical factors will largely be dependent upon
how the Fed reinvests runoff post taper. FHFA Director Watt announced a
plan to reignite HARP refinancing in targeted locations where many borrowers
still qualify for the program. The FHFA estimates that there are approximately
675k borrowers who meet HARP eligibility requirements and are deep in the money
(1.5% above current market rates, have more than $50,000 balance remaining, and
have a remaining term greater than 10 years)[1].
The market’s response to the 6/25 announcement was minimal.
Noteworthy:
The 15 year FNMA 3.0 butterfly is trading close to its cheapest levels in a year. The carry on the fly is – ¼ tick, which is a small price to pay for the potential upside. Our model estimates that the fly is still cheap by 7 3/8 ticks according to its historic price/carry profile.
The 15 year FNMA 3.0 butterfly is trading close to its cheapest levels in a year. The carry on the fly is – ¼ tick, which is a small price to pay for the potential upside. Our model estimates that the fly is still cheap by 7 3/8 ticks according to its historic price/carry profile.
Regards,
Tradex Global Advisory Services, LLC
investorrelations@thetradexgroup.com
203-863-1500
@Tradex_Global
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