Greek drama book-ended the week that led to sharp flight-to-quality trades on Monday and Friday. Meanwhile, Treasury supply weighed on the market the days in between, which caused 10-year note yields to surge to 2.047% by Thursday's close from 1.90% at Monday's close.
For the most part, agency MBS investors took the rallies and sell-offs in a mostly supportive stride given the current outlook of low rates through late 2014, attractive carry and yield, and QE3 prospects.
This was demonstrated by the performance of Barclays Capital's MBS Index in the past week through Thursday, Feb. 9 of 24 basis points in excess return versus Treasurys compared with 0 basis points for ABS and 18 basis points for CMBS.
The major factors that influenced trading this week included prepayment news, supply and QE3 prospects. Speeds in January slowed more than expected. This generated buying across the stack. Higher coupons, in particular, benefited as Home Affordable Refinance Program (HARP) 2.0 was MIA and analysts expect it will be a few more months before refinancings associated with the recent changes become more noticeable.
While lenders can begin to take applications on Dec. 1, there has been a delay associated with Fannie Mae's DU not being updated for the HARP changes until March, while loans with LTVs greater than 125% cannot be placed into pools until June.
Investors required a concession to take down the $72 billion Treasury Refunding this week and sell-offs usually lead to increased mortgage banker supply as they reduce their pipelines.
Indeed, originator selling remained at an elevated $2 billion per day average this week, while the Federal Reserve remained a steady buyer in 3.5% and 4.0% coupons.
The Fed's latest report of weekly purchases indicated daily average buying of $1.25 billion which covered around 60% of the daily supply. Banks, money managers, hedge funds and others advantageously mopped up the excess supply as the 10-year note yield backed up towards 2.0% and prices eased away from recent highs.
Private investors have been opportunistic buyers this year, in large part because of the prospects of QE3.
Despite some recent favorable jobs news (including Initial Claims this week), QE3 odds appeared to be holding in the 40% area, unchanged from before the strong non-farm payrolls print.
In the latter part of January, JPMorgan and Wells Fargo put the odds of additional quantitative easing at around 40% and 50%, respectively. Research this week from analysts at Credit Suisse also stated that the market is pricing in favorable odds at around 40%, which they said was up 10%-15% from a few weeks ago.
Helping to support those odds were comments from Fed Chairman Ben Bernanke and San Francisco Fed President John Williams.
At an National Association of Home Builders conference on Friday, Bernanke noted the importance housing has been historically to the economy's growth and "that has not played out this time."
In his concluding remarks he stated that in addition to the impact of the supply/demand imbalance in housing caused by the sizeable amount of foreclosures and difficulty for potentially creditworthy borrowers to obtain mortgages, "the troubled housing market depresses construction activity and employment." Therefore, "we need to continue to develop and implement policies that will help the housing sector get back on its feet."
This speech followed on testimony he gave earlier in the week before the Senate Budget Committee that was unchanged from last week's appearance before the House Budget Committee despite the strong jobs report.
Meanwhile, the dovish Williams remarked that the Fed might still need to add accommodation if the economy loses momentum or if inflation remains well below 2%. He added that in the event of QE3, the best way to help the economy would be through MBS purchases.
Timing, however, is as elusive as potential implantation. BNP Paribas economists said they continued to expect QE3, although they are now looking for it to occur in June versus April. Societe Generale analysts, however, expects QE3 to be announced at the Federal Open Market Committee's April meeting as their analysts believe the current strength in the U.S. economy is not sustainable.
In other mortgage related activity, trading in specified pools was active with continued strong demand for call protected paper with payups strengthening; 15/30s were mixed according to the yield curve changes, while GNMA/FNMAs also were higher as improved yields drew in overseas buying in GNMAs.
Also aiding GNMAs was a bill — The FHA Emergency Fiscal Solvency Act of 2012 — introduced by Reps. Judy Biggert (R-IL) and Shelley Capito (R-WV) that would provide the Federal Housing Administration (FHA) "with the tools it needs to shore up the health of the FHA insurance fund." Biggert added "The FHA’s cash reserves are down to dangerous levels, and taxpayers cannot afford another Fannie- and Freddie-style bailout." If passed it would likely lead to lower supply in GNMAs as some borrowers would not be able to afford the higher fees.
For the week through Thursday, Tradeweb volume averaged 124% compared with 153% last week. Month-to-date, the Barclays MBS Index has recorded excess return of 30 basis points compared to 9 for ABS, 58 for CMBS and 97 for Corporates.
The 30-year current coupon yield was higher to 2.87% from 2.81% with the spread to 10-year notes holding in the high 80 basis point area.
