FLASH UPDATE: TRV Weekly Commentary

TRV Weekly Commentary
Week Ending 22 July 2014

Comment:

The 10/5 Treasury spread bull flattened 5bps this week on geopolitical risk pertaining to Malaysian Airlines’ flight MH17 crashing near the Ukraine/Russian boarder last Thursday. The passenger flight’s crash amplified the already strained political relations in the area, inspiring a risk-off market mentality. Mortgages opened ~2 ticks wider and ended ~4 ½ ticks wider on the day. Adding to the widening, rolls came off 1/8^th tick and initial jobless claims came in stronger than expected (302k vs 310k). Overall, last Thursday was active on all fronts.

For the time being, Fed purchases continue to support MBS, as 30yr mortgages outperformed their 5yr hedge this week. FNMA 3.5s ended 8 ticks tighter, while FNMA 4s ended 5 ticks tighter. Mortgages did not fare as well against their 10yr hedge due to this week’s bull flattening. Despite the strong weekly performance, we continue to remain neutral on the basis based on balanced flows and our expectation of technicals to worsen over the next few months.

Origination ticked up $759 MM in 30yr mortgages while the refi index increased 53 points and the purchase index fell 13. While geopolitical risk (Russia, Portugal, etc.) has been driving rates lower, we find it unlikely for refinance activity to increase meaningfully. That said, we anticipate turnover ticking up as out of the money collateral continues to season.

Noteworthy:

The GNMA 4 roll was very active this week: Bloomberg prices reached a peak of 9 ¼ on July 18^th before collapsing to 8 ¼. A lack of liquidity in GNMA collateral may be a contributing factor to roll price volatility.

Regards,

Tradex Global Advisory Services, LLC

investorrelations@thetradexgroup.com 

203-863-1500

@Tradex_Global