TRV Weekly Commentary
Week Ending 15 July 2014
Week Ending 15 July 2014
Comment:
Week-over-week, hedged mortgage
performance was flat. Although origination
in FN 30s was lower by ~ $2.0 bln, the basis was unchanged at 154 bps over the
5yr yield. Our regression model
estimates that the basis is wide by approximately 2bps, but we remain cautious
for now given roll weakness and Fed tapering.
Last Thursday, headline risk relating
to Portugal’s Banco Espirito Santo debt drove the 10yr yield down 5 bps early in
the trading day. Fear of contagion monopolized
headlines as a strong initial jobless claim print (304k vs 315k expectation) had
little impact on Treasury yields. 10yr
yields have since been range bound between roughly 2.50 and 2.55 for the remainder
of the week. Range-bound yields have
helped the refi index remain relatively stable, as evidenced by the refi
index. Similarly, the purchase index is
lower, which is expected as summer seasonals cool.
The week has extended a period of
low volatility, with an implied value on the 1m x 10yr swaption remaining at 59
bps. Furthermore, the basis neither
widened nor tightened prior to Yellen’s testimony to Congress on the state of
the economy. Many raised concerns that
Yellen would convey a hawkish message given recent signs of continued economic
recovery. These concerns subsided, as
Yellen’s message to Congress was congruent with previous Fed communications. Yellen expressed concerns regarding risk-taking
in corporate credit. If spreads on
high-yield issuers begins to widen, other spread products (such as mortgages)
may widen as well. We await technical
factors or economic/geopolitical headlines to provide short-term trading
opportunities.
We continue to remain neutral on
the basis. Low volatility has stripped away
short-term trading opportunities, so we continue to monitor the G2 3.5 and DW 3
flys and are constructive on their performance.
Out outlook on the G2 3.5 is especially constructive, given the price is
currently -2.2/32nds!
Noteworthy:
According to an article in the NY Times[1], many hedge fund managers agree that the Fed is behind the market regarding the strength of the economy. These investors take a more hawkish stance than the fed, and opine the need to hike rates sooner than currently anticipated. One manager pointed out that the current unemployment rate (6.1%) is below the threshold at which the Fed has historically acted.
According to an article in the NY Times[1], many hedge fund managers agree that the Fed is behind the market regarding the strength of the economy. These investors take a more hawkish stance than the fed, and opine the need to hike rates sooner than currently anticipated. One manager pointed out that the current unemployment rate (6.1%) is below the threshold at which the Fed has historically acted.
The disconnection between the Fed
and the market creates the risk that market may be caught off guard if the Fed
hikes rates sooner than expected.
Likewise, premature anticipation of a hiking schedule could be equally
costly if bonds continue to rally. Either
way, it will be interesting to see how the Fed’s unprecedented stimulus will ultimately
unwind.
Regards,
Tradex Global Advisory Services, LLC
investorrelations@thetradexgroup.com
203-863-1500
@Tradex_Global
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