TRV Weekly Commentary
Week Ending 29 July 2014
Week Ending 29 July 2014
Comment:
The mortgage basis tightened 4
bps last week to 149 bps over the 5yr yield. The street continues to promote tactical
long positions in the basis for the short term. Lower coupons continued to be
the best performers this week as FNMA 3.5s were up 10 ticks vs their 5yr hedge.
Despite recent performance, we are still not constructive on the basis due to
lower Fed purchases and an expectation of increased supply over the next few
months. We also expect lock desks to short TBAs as rates rise, which could place
further pressure the basis. Our regression model suggests that the fair value
spread to 5yr yields is 150 bps. Sitting
at 149 bps, 1 bps of widening to our fair value estimate translates to 2 1/8 ticks
widening on production coupons. We continue to seek alternatives to the basis to
provide sources of alpha.
One potential opportunity is to
buy the GNMA II 3.5 Roll. We saw a relatively high prepay print last month due
to servicer buyouts of GNMA collateral. The market continues to penalize the
roll (currently at 7 ½ ), but we believe a long position will benefit as
prepays slow.
On the prepayment front, the refi
index fell 56 points this week, and the purchase index remained flat. Low
prepayments and expectations of rising rates has kept IO OASs tight, and we
hold this expectation going forward.
Noteworthy:
On July 24th, we saw a strong initial jobless claims print (284 vs 307k)
and 10yr yields increased above 2.50.
The Fed continues to make dovish statements, but there is gathering
support for the hawks. The strong GDP
print (4% annualized) on the 30th furthered this notion, as the 10yr
backed up 9bp and origination hit $2.2 bln.
After a few false starts, it will be interesting to see if we reach a
turning point in rates.
Regards,
Tradex Global Advisory Services, LLC
investorrelations@thetradexgroup.com
203-863-1500
@Tradex_Global
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