TRV Mid-Month Commentary | April 2015
Comment:
Yields have fallen month to date with the front end of the curve leading
the rally. The price action left the 10yr at 1.89% and the curve 2 bp steeper
5s/10s. The litany of poor economic releases is to blame for the rally, with Non-Farm
Payrolls (NFP) being the most damaging to investors’ sentiment. Change in NFP
came in at 126k versus 245k consensus, but we remind investors that the economy
needs job creation at 80-90k net per month to maintain the unemployment rate.
Retail sales also disappointed having come in at +0.4% versus +0.7%
expectations.
While employment changes receive headline attention, the FOMC notes that
energy prices, the strength of the dollar, and other factors warrant
consideration prior to commencing rate normalization. The slope of the yield
curve implies that investors have changed their estimated liftoff date from
June to September. Although recent economic releases have been poor, some have
chalked them up to be noise in an otherwise healthy economy.
April’s MBS prepayment print was much anticipated due to January’s
dramatic drop in rates and the 50 bp Mortgage Insurance Premium (MIP) cut for
GNMA collateral. Higher purchase seasonals and a greater March day-count
further contributed to speeds. Overall, 30yr collateral increased 23% with new
vintage cuspy coupons, such as 3.5s and 4.0s of 2015, notably higher having
increased 39% and 119%, respectively. GNMA-I and GNMA-II voluntary prepayment
speeds increased 31% and 23% respectively, largely on the 50bp MIP reduction
that was announced in January.
Related to speeds, the FHFA announced that it will eliminate the adverse
market charge instated in 2008 and will replace this revenue by increasing
guarantee fees. For high LTV and low FICO borrowers, the LLPA charges will drop
25 bps. Since the option to refi is less callable for this subset of borrowers,
we expect the overall market impact of the policy change to be minimal.
In the mortgage market, the dramatic decrease in vol and the steeper
yield curve pushed MBS noticeably tighter with 3.5s outperforming the Treasury curve
by 11 ticks. Benchmark IOs did not fare as well as lower rates reignite
prepayment fears. IOS 4s widened between 30 and 45 bps the last two weeks while
4.5s widened closer to 60 bps. We view this temporary widening an opportunity as
carry remains attractive and the fastest speed prints are likely behind us.
Noteworthy:
We see upcoming opportunities in mortgage credit markets. First, FNMA
released details regarding the sale of non-performing loans to private
investors. Such new deals may provide yield that investors desperately desire
at discounted prices. Secondly, HPA came in +5.7% year-over-year providing
relief to underwater borrowers. As curing continues, voluntary prepayments may
provide future upside as most RMBS are priced below par. Lastly, there is approximately $5.6 bln of
current pay, never modified 10yr IO loans that are set to begin amortizing. As
such, Alt-A deals with this collateral may provide considerable prepayment
upside that we feel the market isn’t accurately pricing.
Regards,
Tradex Global Advisory Services, LLC
investorrelations@thetradexgroup.com
203-863-1500
@Tradex_Global
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