FLASH UPDATE: TRV Weekly Commentary

TRV Weekly Commentary
Week Ending 16 Sep 2014

Comment:

The yield curve steepened six basis points Tuesday to Tuesday between 5yr and 10yr maturities to 82 basis points ahead of the FOMC statement on Thursday. Market participants looked to see whether the ‘considerable time’ language remained in the FOMC statement with respect to the federal funds target range. The language indeed remained and the Committee decided continue to reinvest portfolio runoff past a rate hike. In line with the curve steepening, lower duration mortgages performed the best with FNMA 4.5s leading the stack up six ticks vs its 5yr hedge on the week. We continue to remain neutral on the basis as Fed takeout of total issuance is still large, but will inevitably decline. Analysts estimate that Fed reinvestment will result in a 30% takeout of gross issuance by the end of the year, down from 38% of current takeout, adjusting for CMOs.

The refi and purchase indices were relatively flat this week, both ending within a point of last week’s levels. There was a noticeable uptick in BWICs and trading volume in IO and IIO markets, with most selling coming from fast-money in lower coupons. Volatility ticked up this week pre FOMC, helping to push OAS wider. FN IO 4s of 13 led the widening at seven basis points wider. This week’s moderate widening reversed last week’s tightening in benchmark IOs (GNR 2010-26 QS, GNR 2010-20 SE, FNR 13-121 SA, etc.).

Specified pools payups were relatively unchanged this week. Most notably, LLB, MLB, and HLB payups on 4.0s all fell a tick. In terms of OAS, CK 4.5s widened the most (7 bps), while the street anticipates a convergence of speeds hedge ratios for specified 4s relative to TBAs. The carry profile of spec 4s, relative to TBA, should improve on converging speeds.

Noteworthy:

We like up in coupon IOS 4.5s of 2010 versus IOS 3.0s of 2012, matched one-for-one current face. The trade offers 3 ticks of positive carry and is poised to tighten in terms of OAS as investors become more comfortable with low prepayments in up in coupon IOs.

Regards,

Tradex Global Advisory Services, LLC

investorrelations@thetradexgroup.com 

203-863-1500

@Tradex_Global