FLASH UPDATE: TRV Weekly Commentary - Opportunity in IOs

TRV Weekly Commentary
Week Ending 17 Dec 2014

Comment:

This week was an active week in trading, particularly in commodities, rates and MBS derivatives on market turmoil. Below are some highlights that have contributed to the increase in vol this week:

• WTI crude futures reached an intraday low below $55/barrel on the Tuesday (see graph)
• The Russian ruble depreciated to a high of $79.16 USD from $64.23 USD (see graph)
• The Swiss National Bank imposed a negative 4.6 bps deposit rate on Thursday
• The FOMC meeting minutes reflect a close monitoring of inflation and the “transitory effects of lower energy prices” on Wednesday
• The 10/5 spread compressed 8 bps
• The 10yr reached an overnight low of 2.01 on Tuesday

Implied vol on 10yr swaps increased 3 ticks on these data points and we saw equities, spread and credit products sell-off. The market turmoil largely began due to lower energy prices, causing the Russian Ruble to depreciate substantially. From there, a domino effect insured with the S&P500 selling off 2.64%, the mortgage basis underperforming by 4 to 9 ticks versus 10yr hedges, and IOs cheapening between 10 and 64bps of OAS.

In IOs, we argue that it may be an opportune time to be in the market as the underlying fundamentals are intact and refi risk is contained. A meager drop in mortgage rates and an unchanged refi index support this thesis. We see the best opportunity in 3.5s of ’13 as the IO benchmark widened 64 bps this week. Another potential opportunity lies in RMBS as 60+ delinquencies are generally declining, LTVs have been improving, and dealers have inventory in their balance sheets that can be cleaned up before year-end. We have seen some paper with strong credit support and stable cash flow selling for LM70s that may be sourced cheaply.

As we prepare to launch in the next couple of weeks, we look forward to future market dislocations that will provide opportunities in our markets.

Regards,

Tradex Global Advisory Services, LLC

investorrelations@thetradexgroup.com 

203-863-1500

@Tradex_Global

Russian Ruble vs WTI crude futures