FLASH UPDATE: TRV Weekly Commentary

TRV Weekly Commentary
Week Ending 02 Sep 2014

Comment:

The yield curve steepened 3bps as the 5yr sold off 6 bps Tuesday to Tuesday on stronger ISM numbers. A few dealers speculated that the Sep 2 rates sell-off was a result of a peaceful weekend despite Prime Minister David Cameron raising Britain’s terror threat level to ‘severe’ last Friday. Implied volatility on the 1Mx10 YR swaption increased another 7 bps last week, of which 4 bps increase occurred on Friday.

In mortgages, primary rates reached a local trough at the end of August as we saw the refi index increase 1.4% to the highest level in 12 weeks. Not surprisingly, payups to TBA increased the most (+0-8) for call-protected CR >125 LTV 4.5s this week. On a z-score basis, LLB, MLB, and HLB 3.5s increased more than 3 standard deviations (+0-060 each) over the past 5 days as call protection cost increases. The price of call protection is currently the highest for >105 LTVs and LLBs for 4.5s as refi concerns gain momentum. Projected 1M speeds for these stories are 9.59 and 23.46, respectively.

Benchmark IO OAS continues to widen as FN30.400.13 increased 7bps to 176 bps on higher volatility and lower mortgage rates. FN30.400.11 IOs are trading much richer at 60 bps as seasoning plays a significant factor in pricing. Price multiples for IO 4s of 13 and IO 4s of 11 closed the week at 6.664 and 6.398, respectively. Despite recent widening, we still see valuations at the tighter end of the range with a lot of interest in higher coupon Ginnies.

Noteworthy:

Trace data show that August saw the lowest Agency mortgage derivative volume of the year. Despite the low volume, it was the second highest net customer derivatives buying of the year. The seemingly juxtaposed circumstance points to low customer selling and low new issuance.

Regards,

Tradex Global Advisory Services, LLC

investorrelations@thetradexgroup.com 

203-863-1500

@Tradex_Global