Based on volume, this week was one of the quietest since July with Tradeweb at 77% through Thursday.
Limited and lower tier data was one factor with Friday's first peek at 3Q12 GDP the highlight, and as it was in line with expectations it was not particularly stimulating.
While the Federal Open Market Committee (FOMC) met over midweek, there was nothing expected as QE3 was implemented just six weeks ago. Indeed the FOMC's statement was benign with current policy actions still remain in place for the near-term horizon.
Many securitization participants were away attending two major conferences through part of the week, the Mortgage Banker Association's (MBA) Annual Convention & Expo in Chicago and Information Management Network's ABS East Conference in Miami, which likely added to the sub-par volume.
Mortgage banker selling was also on the lighter side versus recent weeks with the daily average at $2.5 billion compared to $3+ billion as Treasurys traded in a relatively limited range, while refinancing activity declined. In the MBA's weekly mortgage application survey for the week ending Oct. 19, the Refinance Index fell 13% and is back to its level just before the FOMC announced QE3.
For the most part, real and fast money were opportunistically two-way across the coupon stack on any given day, taking advantage of price levels and changes, any supply-induced widening, and trading within the current range of +44 to +52 basis points.
Meanwhile, the New York Federal Reserve reported its gross and net buying for the week ending Oct. 24 totaled $15.7 billion, or an average of $3.1 billion per day. Purchases in 30-year 3.0%s declined to 59.2% from 70.4% with 3.5s increasing to 18.5% from 7.3%. Of note, the majority of the bank's purchases were for December, which led to some weakness in both the FNMA 3.0 and 3.5 rolls.
In other mortgage-related activity, trading in specified pools was active over the first half of the week with BWICs from money managers taking profits. Payups, however, were not adversely impacted due to demand for call protected paper from real money and dealer desks. Dollar rolls were mixed with production coupons lower and the belly higher with the FN 5 November/December roll recording particular strength. Meanwhile, lower coupon 15s outperformed 30s with support from a steeper yield curve, while GNMA/FNMAs were higher in 3.5s and 4.0s and lower elsewhere.
The Barclays MBS Index recorded two basis points in excess return to Treasurys over the week ending Oct. 25, which brought the month to date performance to negative three basis points. Over this same period, the 30-year current coupon yield rose over eight basis points to 2.327% with the current coupon spread widening to +52 from +48.
Eventful Weeks Ahead
While volume was limited this week, the next couple of weeks have plenty going on that could potentially stimulate it. The biggest event is the 2012 elections on November 6 and they are especially important, said Barclays Capital, because the incoming administration will face decisions related to: fiscal policy, including the immediate issue of the fiscal cliff; the appointment of a Federal Reserve Chairman as Ben Bernanke's term expires in early 2014; housing finance, and the mortgage markets which include the future of the GSEs and leadership of the Federal Housing Finance Agency (FHFA).
Rates analysts predict the initial reaction to a Mick Romney win would be a rate sell-off in the belly of the curve as they see a lower chance of the fiscal cliff being hit and higher fed funds expectations a few years out. In particular, they predict the 10-year note yield would rise to 2% in a knee-jerk reaction. Meanwhile, a rates rally is seen if President Barrack Obama is re-elected with 10-year yields declining to 1.5% or even lower if chances of the fiscal cliff being hit increase substantially.
Credit Suisse analysts think that an Obama win would be neutral to slightly positive for MBS in the near term as it would be status quo for the markets which suggests a decline in volatility. A Romney win, meanwhile, could lead to some knee-jerk widening related to a positive risk-on/rate sell-off response from the markets.
Looking to the longer term impact, they thought MBS valuations should be similar in a strong economic recovery regardless of who is elected. In a "muddling" recovery, a risk seen with an Obama win was replacement of acting FHFA Director Edward DeMarco with someone who is more amenable to principal reductions on underwater mortgages. Under Mitt Romney in this scenario, they would anticipate increased volatility associated with the possibility of less Fed support beginning in 2014 under a new Fed chairman appointed by a Republican administration. As for the running of the FHFA, odds were deemed favorable for DeMarco remaining at the helm under a Romney win. Barclays, however, believed that a change in FHFA leadership was likely if Romney became president. In addition, they pointed out that some of the key economic advisors to Romney favor mass streamline refinance programs.
In addition to this unique event, the MBS sector is entering into its traditionally supportive time of the month with month-end index buying potential on Wednesday, followed by nonfarm payrolls next Friday which tends to lower vol, news of principal paydowns available for reinvestment (Nov. 6), and concluding with Class A pool allocations.
