FLASH UPDATE: TRV Weekly Commentary

TRV Weekly Commentary
Week Ending 8 July 2014

Comment:

Week-over-week, mortgages outperformed the 5yr, with discount MBS outpacing premiums. Spread duration partially accounts for the outperformance while the Treasury curve flattening 5 bps between 10s and 5s. 10yr Treasuries rallied 7 bps this week, causing the current coupon mortgage (FN 3.5s) to underperform its hedge by 8 ticks. Our regression model suggests that fair value of the mortgage basis (FN 30 CC yield – 5yr Tsy yield) is 153 bps or 2 bps tighter than current levels. Despite projected fair value, we continue to remain neutral on the basis and await short-term trading opportunities post Fed Minutes and initial jobless claims this week. Our neutral view is predicated on spreads being close to tights over the month, the Fed continuing its taper program and heavier origination.

June speeds on Class A securities came out faster than projected (+12% vs estimated +5-10% MoM). Production coupon FN 3.5 TBA speeds increased 15% this month despite a flat day count. The faster speeds can be attributed to increased MBS seasoning, newer issue speed ramping, and better home sale activity. The MBA Refi and Purchase indices increased 5.6% and 0.9%, respectively, from April to May.  These data points support the higher June prepayment prints. Our view is that the June and July prints may be the peak for 2014 owing to seasonal summer purchases.

Noteworthy:

Higher speeds and heavy selling by money managers over the last few days have put pressure on the roll. The FN 5 roll has fallen 2+ ticks while the FN 3.5 roll has fallen 1 tick.

Additionally, the G2 3.5 and DW 3 Flys continue to cheapen and may provide potential upside given price/carry profile.

Regards,

Tradex Global Advisory Services, LLC

investorrelations@thetradexgroup.com 

203-863-1500

@Tradex_Global