MBS RECAP: Fairly Pronounced Underperformance vs Treasuries, but Still a Victory


MBS got very close to their best levels of the year today, as did mortgage rates.  Treasuries, on the other hand, crashed through their previous floor by several bps following headlines that suggested Ukraine and Russia are on the verge of war.  One caveat to those headlines is that NATO has yet to confirm that any of the underlying events actually transpired, not to mention more recent reports of Russia denying the presence of any military personnel in the humanitarian convoy.

This is par for the course when it comes to geopolitically-motivated bond market rallies, and it’s made worse by the fact that MBS have some other considerations weighing them down specifically.

laundry list thoughts include:

  • decreasing summertime liquidity is more of a factor for MBS vs Treasuries
  • Uncertainty surrounding some sort of legislative intervention in securitization markets–however uncertain that may be
  • Recent FHFA proposal to merge Fannie/Freddie securities.
  • Limited “room to run” as the next coupon down from current most-liquid
    coupon does not yet look like a safe place to congregate.  (i.e. no one
    wants to be left holding that bag of Fannie 3.0s when 3.5s are already liquid and may well be as low as liquid coupons go.  Wheatver the case, it’s just too soon to buy in to 3.0s as a coupon with staying power).

Beyond those MBS-specific concerns, lenders tend to be more conservative heading into weekends.  All that having been said, rates still managed to come very close to their best levels of 2014, so we can’t complain too much.  Our clients should understand, however, that mortgage rates simply aren’t falling as quickly as Treasuries in this environment.

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