FLASH UPDATE: TRV Weekly Commentary

TRV Weekly Commentary
Week Ending 23 Sep 2014

Comment:

Treasuries rallied this week as 10yr yields tumbled to 2.53 from 2.62 on increased geopolitical concerns and strife in the Middle East. The rally came in spite of Thursday’s strong initial jobless claims that came in at 280k vs 305k expectations. Although rates rallied, the yield curve flattened yet another 2 bps, leaving the 10/5 spread at 77 bps. Implied volatility on the 1M X 10yr swaption fell 4 basis points to 61 (a local low) in the event-filled week that contained Fed minutes, Scottish Independence referendum, and airstrikes. In mortgages, the basis held up well vs 5yr hedges with lower coupons providing the greatest return in the rally.

The refi index fell an additional 99 points, further easing refi concerns for cuspy coupons that exhibit high convexity. This week was another active week in Agency IO/IIO ahead of the FOMC meeting as the market saw about $1 BB in BWICs. We saw OAS on premium IOs (4.5s+) tighten between 15 and 20 bps while IO 4.0s and below widened a couple of basis points. Higher coupons continue to be well bid as investors priced in materially lower expected prepayments.

In contrast to TBAs outperforming spec pools in the second week of September into a sell-off, we saw specified pool payups generally increase into the rally. Seasoned 2012, 2013 and 2014 collateral was between flat and up 3 ticks, with 4.5s seeing the most price action. The greatest change in payup we saw was FN 3.5 LLBs decreasing 4 ticks.

Noteworthy:

The MBX 400.10 -50bps swap (vs MBX 350.10) closed at $2-25 this week, leaving the price at the first percentile, or -2.5 standard deviations, from its 2 month mean. The trade offers ¼ of a tick in positive carry on a matched DV01 basis.

Regards,

Tradex Global Advisory Services, LLC

investorrelations@thetradexgroup.com 

203-863-1500

@Tradex_Global