FLASH UPDATE: TRV Weekly Commentary

TRV Weekly Commentary
Week Ending 26 Aug 2014

Comment:

The yield curve shifted in a non-parallel fashion last week (Tuesday to Tuesday) with the 5yr increasing 3 bps and the 10yr falling 3 bps to yield 2.40. The 5/10 spread consequently flattened 6bps for the week ending at 74 bps. Curve flattening typically drives mortgage rates lower, thus increasing refi incentives. Moreover, mortgage rates began to decrease this week and showed higher correlation with Treasury rates. These notions vindicate the 14-point increase in the refi index and the wider IO OAS week-over-week. The cuspy benchmark 4s of 14 IO widened 7 bps despite implied vol on the 1MX10YR swaption decreasing 8bps.

Lower vol and outright purchases drove the mortgage basis tighter 8 bps to 148 bps over the 5yr. Discount FNMA 3s performed the best of the stack ending tighter 21 ticks this week. The street maintains the view that the MBS curve is working its way out of up-in-coupon swaps, driving better performance in discount MBS vs Treasuries.

Issuance remains elevated this week as the total 5-day moving average this week was $1.59 bln, compared to $1.62 bln, $1.43 bln, and $1.45 bln for the weeks ending August 19, August 12, and August 5, respectively. Increased issuance and Fed tapering continue to bias our negative outlook on the basis.

Noteworthy:

FHLMC issuance increased significantly last week as a portion of 30-year conventional issuance. For the week ending August 19, FHLMC issuance was 48%, while this week it was 80%. Slightly better fungible execution partially explains the boost in Gold issuance week-over-week.

Have a Happy Labor Day,

Tradex Global Advisory Services, LLC

investorrelations@thetradexgroup.com 

203-863-1500

@Tradex_Global