TRV Weekly Commentary
Week Ending 28 Jan 2015
Week Ending 28 Jan 2015
Comment:
The yield curve continued to bull-flatten post January Fed minutes in
contrast to numerous 2014 projections. We interpreted the tone of the minutes as
more dovish than recent months and point to “Market-based measures of
inflation… have declined somewhat substantially” as evidence of the tone. We
note that January’s statement replaced “somewhat further” with “substantially”,
giving indication that the 2.0% inflation target may continue to run below
mark. Investors agreed with our interpretation of the Fed’s statement as yield
on 10yr Treasuries fell 7 bps to an intraday low of 1.70%.
The mortgage market was strong leading up to the Fed’s announcement,
with lower coupons outperforming the 10yr by 7 1/8 ticks, and higher coupons outperforming
by 4 5/8 ticks. This was largely due to rising yields and short-covering given
the previous week’s weakness. However, the magnitude of Syriza victory in the
Greek elections led rates between 3 and 5 bps lower. The Syriza party is known
for anti-austerity sentiments that could potentially be damaging to the Euro
Zone.
In the days leading up to month-end, rates dramatically fell and renewed
refi fears. The refi-index shows no change this week due to how the week fell
in the calendar. We expect an uptick in the index, however, as rates approach all-time lows. Rate volatility has
spurred a significant amount of trading: about 9 billion of Agency derivatives went
out to bid with ¼ not trading. “DNT”
(did not trade) is an indicator of widening spreads and decreased liquidity as
bids do not meet reserve levels. Post-HARP GN collateral fared the worst (-11%)
given the 50 bp reduction in mortgage insurance premium while conventional TBA
collateral was likewise hit hard (-8%). Benchmark IOs behaved as expected,
widening between 40-100 bps depending on vintage. We expect continued
opportunity in the sector as most derivative books are likely down between 5
and 8% unlevered, erasing a large portion of their 2014 gains.
Regards,
Tradex Global Advisory Services, LLC
investorrelations@thetradexgroup.com
203-863-1500
@Tradex_Global
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