QE3 got a shot in the arm as the week started with Federal Reserve Chairman Ben Bernanke's speech about recent labor market developments.
While Bernanke acknowledged recent gains, he noted that "a significant portion" of this was a result of a decline in layoffs rather than a pickup in hiring.
He added that "despite the recent improvement, the job market remains far from normal" and that "consequently, the Federal Reserve's accommodative monetary policies, by providing support for demand and for the recovery, should help, over time, to reduce long-term unemployment."
The interpretation that further quantitative easing remained on the table along with low rates into 2014 was the green light needed for money managers, hedge funds, banks, REITs and other real money to pile into lower coupon mortgages once again after a brief stint with (convexity-selling) disaster following the Federal Open Market Committee's statement two weeks ago.
Luckily, the prospects of QE3 along with near term supportive events such as month-end index buying (today) and reinvestment of paydowns (early April) attracted broad investor participation as originator selling ramped up to around $3.0 billion per day from Tuesday through Thursday.
For the most part, investor flows were down-in-coupon though at times money managers were opportunistic across the stack in terms of both buying and selling. At the same time, while the Fed remained a steady buyer with its support averaging just $1.4 billion per day or less than 70% of the supply.
In addition to high TBA selling, originator BWICs surged to well above normal. This was due to the rush by servicers to close loans before a 10 basis points increase in the guarantee-fee (g-fee) goes into effect on April 1. The g-fee increase is to pay for the temporary extension of the payrolls-tax cut that was signed into law in late December.
In other mortgage activity, dollar rolls were pressured on higher prices and early rolling from money managers and servicers, especially Gold which led FHLMC Golds/FNMAs lower.
Meanwhile, GNMA/FNMAs were mixed with 4.5 and 5.0s lower and other swaps higher, and 15s lagged 30s as the curve flattened.
Selling from mortgage bankers averaged $2.3 billion per day from $1.9 billion last week and consisted of 3.5% and 4.0% coupons. While supply picked up, volume held steady at a 99% average for the week through Thursday compared to 100% previously.
Excess return to Treasuries for Barclays Capital MBS Index for the week was negative six basis points. However, month-to-date through March 29 the sector outperformed by 48 basis points and for the quarter is up 97 basis points. The 30-year CC yield declined to 3.01% from 3.13% last week with the spread to 10-year notes tightening to +85 basis points from +91.
Prepayment Outlook
Prepayment speeds are expected to increase 10-15% on average in March as a result of a higher number of collection days, a pickup in refinancing activity due to record low mortgage rate levels in February, and the rush by servicers to close conventional loans before g-fees increase.
Overall, paydowns are predicted at $132 billion, while month-to-date gross issuance totals $148 billion. The March prepayment reports are due out April 5.
