The holiday-shortened first week of July and third quarter had its own brand of fireworks with more records set on various MBS benchmarks as central bank easing actions in the European Union and China, along with weak economic news, kept the bid on risk aversion.
New price highs were set in mortgages on 30-year 4.5% coupons and lower as prospects remained favorable that the Fed would engage in additional quantitative easing. Friday's employment report, as usual, was particularly viewed as having a significant influence on the odds. For sure a disappointing print of +80k versus a consensus expectation of +90k did not reduce them. At this time, Bank of America Merrill Lynch analysts are expecting the Federal Open Market Committee to launch the third round of quantitative easing in September with an additional $500 billion in asset purchases.
There was widespread participation in lower coupon MBS as investors were motivated by the weak economic reports throughout the week. The supply technicals were also supportive with mortgage banker selling averaging $1.9 billion per day with the Fed essentially covering over 60% of the supply as their buying continued at an average $1.2 billion daily pace. Volume, however, was limited as many were out due to the midweek holiday with Tradeweb averaging 73% through Thursday compared to 101% last week.
Aiding activity down in coupon as well was the looming June prepayment report, although light two-way flows were noted in fuller coupons throughout the week. The largest percentage increases are expected in 4.0% coupons and lower as credit-eligible borrowers took advantage of the successive record lows in mortgage rates that began in early May, while modest increases are seen in Home Affordable Refinance Program (HARP) 2.0 refinances.
Speaking of record low mortgage rate levels, a new historic low was hit this week with the 30-year fixed rate averaging 3.62%. However, refinancing activity is not likely to be too responsive as many borrowers have already responded to the successive lows set starting in May. Indeed, since peaking at 5590 in early/mid-June with mortgage rates at 3.67%, the Mortgage Bankers Association's (MBA) Conventional Refinance Index has declined 22%.
In other mortgage related activity, trading in specified pools was especially active with Originator Cycle BWICs ahead of Tuesday's Class A (30-year conventionals) pool allocations totaled over $20 billion. The lists contained sought after call-protected paper such as loan balance, MHA and high LTV which kept payups well supported. 15s lagged 30s on a flatter yield curve and also as activity was concentrated in 30s.
Meanwhile, GNMA/FNMAs were mixed with 3.0s and 3.5s higher, while fuller coupons were lower on prepayment risk associated with the FHA MIP reduction for pre-June 2009 borrowers. While the MBA's Government Refinance Index is down 40% since hitting a record high of 8872 for the week ending June 15, it remained at an elevated 5324 for the week ending June 29.
Credit Suisse analysts suggested in recent research that if the index drops to 3000, August prepayments on mortgage insurance premium reduction-eligible GNMA cohorts should be similar to the July increases. If it remains elevated in coming weeks, "it will imply even higher August speeds on these cohorts." Currently, speeds on 2008 cohorts and earlier are projected to surge 10-30 CPR on 4.5s and 5.0s in July (reported in August), 5-10 on 5.5s and by 2-6 on 6s and 6.5s. In August, speeds along these coupons and vintages are predicted to increase a further 1-2 CPR.
In the first three days of trading in July, Barclays' MBS Index is up three basis points. The 30-year current coupon yield has declined to the low 2.60s from mid-2.60s late last week, while the spread to 10-year notes holds at +105.
