Just about every week so far in 2012 has had a headline or tape bomb to deal with and this week was no exception. In fact, there were two that directly hit the MBS sector, which are the Federal Housing Administration (FHA) mortgage insurance premium announcement and February prepayments.
On Tuesday morning, the White House announced that beginning June 11, FHA will lower its up-front premium to 0.1% and cut the annual fee to 55 basis points for streamlined refinancings for loans originated before June 1, 2009.
Currently, the FHA charges are 1.0% and 1.15%, respectively. The White House estimated 2-3 million FHA borrowers will be eligible to benefit with the typical borrower saving around $1,000 per month.
The impact on speeds will not begin to show until this summer and when it does, Deutsche Bank Securities analysts projected one-year speed increases on 4.0% and 4.5% coupons for the eligible 30-year pools to be over 10 CPR and around 3 CPR on 5.5s.
This is in line as well with Morgan Stanley analysts' expectations of an incremental impact of 8-10 CPR on 4.5s to 1-2 CPR on 5.5s and 6.0s. They think the increased refinancings could add $1 billion in monthly supply. However, the Federal Reserve is expected to support the sector.
GNMA/FNMA swaps, which have been pressured since mid-February, declined further on the prospect of increased call risk.
For example, GNMA/FNMA 5.0 closed at 2-08+ on Tuesday, March 6, from 2-13 on Monday and down from 3-09 in mid-February; 5.5s ended at 2-09+ compared to 2-12+ at the start of the week and 3-03+ three weeks ago.
Later in the afternoon on Tuesday, February prepayment reports were released and conventional speeds were faster than expected across the coupon stack with lower rates, looming g-fee increases and Home Affordable Refinance Program (HARP) activity all making noise in the report.
The prepayment reports primarily hit trading on Wednesday with dollar rolls getting crushed in anticipation of faster speeds in coming months, while real money sold higher coupons based on fears of the effect of HARP looming.
By mid-afternoon, however, both GNMA/FNMA swaps and MBS were recovering. GNMA/FNMAs improved on relief buying as GNMA speeds were more in line with expectations, while the cheapening in conventional 30s drew in yield buyers and money managers as well as the Fed. Also encouraging investors to add was news of REITs raising cash.
Thursday held a more solid tone with supply/demand dynamics clearly in charge as cheaper levels, less risk aversion on optimism over Greece, a 10-year note yield hovering 2.0%, and the prospect of REITs support brought real money back in the game. REITs have the potential for being the marginal buyer after the Fed if the SEC ruling on leverage is resolved favorably.
JPMorgan Securities analysts noted in recent research that REITs have raised around $15 billion in capital which could result in possibly $100 billion in MBS-related purchases based on past leverage levels of 6-7 times. Until that is resolved, however, they estimate REIT buying for 2012 at $25 billion.
Friday had the potential for being a headline/tape bomb session with the employment report. But it wasn’t despite a slightly stronger than expected print for nonfarm payrolls with decent upward revisions made to January and December, while the unemployment rate held steady at 8.3%.
The 10-year Treasurys had only a modest adverse reaction to the news as most of it was already priced in however, a backup in the yield towards 2.05% provided an attractive entry opportunity given the favorable supply/demand outlook and money managers, hedge funds, REITs and the New York Federal Reserve took advantage of this and more than offset the over $1 billion in supply reported at mid-day. Spreads were 3-4 ticks tighter across much of the stack, while GNMA/FNMA 5.0s and 5.5s were both at 2-16.
Keeping with the supply/demand theme, selling from originators averaged $1.8 billion per day on average, in line with last week's level.
Meanwhile, the New York Fed bought $1.2 billion (net) per day on average based on their latest weekly report indicating coverage of 67% of the supply.
Buying from the Fed in the four-week period that begins March 13 will increase from the last four-week period because of the higher paydowns in February. Deutsche Bank analysts estimated buying at around $29 billion or an equivalent of $1.5 billion per day. This compares to $25 billion from mid-January to mid-February and $24 billion in the most recent four-week period that ends March 12. The Fed will officially announce its tentative purchases next week.
In other mortgage activity, 30-year conventional dollar rolls were adversely hit on faster prepayment expectations and Class A notification which was Thursday. The 15% coupon outperformed 30s with some benefit from a steeper curve, while 30s were impacted by the prepayment report; and GNMA/FNMAs recovered from their FHA swoon and ended higher over the week. Specified trading was busy between originator and Treasury BWICs. However, with rolls lower and demand for call protection higher, payups held firm.
Tradeweb volume averaged 96% for the week through Thursday compared to 108% last week. Month-to-date excess return on Barclays Capital 's MBS Index was 10 basis points and compared favorably to ABS (negative nine basis points) and Corporates ( negative two basis points), but lagged CMBS (21 basis points). The 30-year current coupon yield held to a 2.90% area with the spread to 10-year notes remaining in the low 90 basis points which is near the middle of its year to date range.
