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  • Market Update for Tuesday Jan 5th

    The Clemson defense has 11 players that will be going pro in something other than sports. More mixed flows today after heavy back and forth yesterday. MBS remain well bid, and any origination by lenders has been easily absorbed by the combination of the Fed, money managers, hedge funds and banks. The bid for Treasuries is picking up once again, with better buying of 10 years from the money manager sector. Pension funds and banks have been better buyers in the 30 year space.

    Thus far, trading in 2012 has continued to focus on Eurozone concerns and the risk off trade has bonds trading higher and the yield curve flatter – led by weaker German retail sales and Spain being severely undercapitalized.

    The other factor, which was touched on yesterday, is the FHFA’s directive to raise g-fees across the board by about 10bps to mortgage lenders. There were many questions yesterday about the potential effects on mortgage rates and the conclusion is that it might not be too bad. True, there will be a global hike in g-fees and we’re starting to see that get priced into the market. That spread however, is also driving something else: prepayment speed expectations. With a higher g-fee, financing to borrowers will be more expensive, therefore creating a barrier to prepayment speed expectations. With a higher g-fee, financing to borrowers will be more expensive, thus creating a barrier to entry for many people to refinance.

    The MBS market likes that as it eliminates prepay risk, thus all of the recent tightening in the past few days. In fact, 30 year mortgages have tightened by over 13bps, effectively neutralizing the g-fee hike. It’s true, that some of the tightening is due to a lack of supply from originators over the holidays, but the point being is the announcement probably isn’t as bad for mortgage rates as originally thought.

    Jan 5 2012