There have not been very many weeks yet this year where the markets have not been roiled about something, and the last week was not one of them either.
There were three key events on tap: the Federal Open Market Committee (FOMC) minutes on Tuesday, prepayments on Thursday and nonfarm payrolls on Friday, not to mention more eurozone worries. These events all set the tone from the get-go.
Heading into the FOMC minutes, volume was limited with two-way flows focused in lower coupons from hedge funds and money managers, while the Federal Reserve and REITs were buyers.
With more discussion focused on improvements in the economy and not much on policy, the odds of a third round of quantitative easing were further lowered with the 10-year note losing over 3/4 of a point on Tuesday. Mortgage banker supply and selling from hedge funds ramped up sharply as a result.
A flight-to-quality bid reasserted itself on Wednesday through Thursday based on increasing concerns about Europe, particularly Spain, with Treasurys more than recouping their FOMC-induced losses. The firmer market on Wednesday following Tuesday's cheapening drew in active buying from money managers, with additional support from the Fed, hedge funds and overseas investors. Money managers, banks and others remained better buyers on Thursday. However, volume was light as some investors took to the sidelines ahead of the prepayment and employment reports.
Speeds increased less than expected in March which drew buying in 4.5% coupons on up from fast money and money managers. Prepayments were projected to increase 10%-15% on average. However, 30-year FNMAs rose just 7% with all coupons below expectations while 15-year FNMAs showed a similar trend, increasing just 3% versus an 11% prediction.
The 30-year FHLMC Golds were closer to expectations at a 9% increase on average as speeds on 5.5s through 6.5s were more in line with projections, while Ginnie Mae speeds were slower than expected along 30-year 3.5s through 5.5s. However, surged on 6s and 6.5s on delinquency buyouts from Bank of America.
HARP 2.0's influence remained minimal overall, though it is expected to increase in coming months, while GNMAs were impacted as certain borrowers temporarily exited the refinancing process.
Effective June 11, the upfront and annual mortgage insurance premium for Federal Housing Administration borrowers underlying loans that closed before June 1, 2009 will be sharply reduced. As a result, slower speeds are anticipated through May from this group and then to begin increasing in June.
QE3 may have gotten a boost following a much-lower-than-anticipated increase in nonfarm payrolls at 180k versus a predicted 203k, while the unemployment rate slipped to 8.2% from 8.3%, which is attributed to Americans leaving the labor force.
Thin trading markets likely exaggerated the market's response on Friday morning. However, 10-year notes closed up 35 ticks at the early 11:00 markings with the yield at 2.051%. The lower coupons were seeing support on the rally and perceived improvement in QE3 odds, though volume was very light at just 49%, according to Tradeweb. This is because many participants were out for the shortened trading session and the long Easter weekend.
In other mortgage-related activity over the week, rolls were pressured most of the week on higher prices and prepayment worries. However, they were improving following the prepayment report along the middle of the coupon stack. The 15s lagged 30s as the curve flattened, while GNMA/FNMAs were higher as the new month (and a new year for Japan) drew in overseas interest.
Supply remained relatively high at a $1.9 billion per day average. However,it eased back from $2.2 billion in the prior week. The Federal Reserve, meanwhile, remained a steady buyer at $1.4 billion per day on average. The week's events contributed to a pickup in volume, which averaged 110% through Thursday. But it was brought down to 97% on Friday's contribution compared to 101% previously.
Mortgages were off to a slightly weak start for April with Barclays Capital's MBS Index underperforming Treasurys by four basis points through April 5. The 30-year Current Coupon yield declined to 2.95% from 3.01%, while the spread to 10-year notes widened to +88 basis points, which is at the wider end of its recent range, from +85.