The Current Disconnect Between MBS and Treasuries

More than a few of you have asked for a chart of the relative performance of MBS versus Treasuries.  Here a couple quickies that I think really illustrate the disconnect.  The first chart is simply of Fannie 4.0 30yr MBS Yields vs 10yr Yields.  I set each of the Y-axis scales to the same distance between highs and lows (3.0 to 4.0 for MBS and 2.0 to 3.0 for 10yr notes).  That should give a better sense of how the two have moved relative to each other. 

Keep in mind that there’s a SUBJECTIVE component in determining MBS YIELDS!  While prices are objective based on the marketplace, yields must be calculated based on a model that adjusts for the infinitely variable speed at which MBS coupons are paid down.  Even so, most anyone’s model is going to be showing a similar relationship to Treasuries at the moment, just that the specific levels might vary. 

Notice the time frame around the 5th of the month where MBS begin to “stay higher” in yield relative to Treasuries.  This is a perfect visual representation of the “risk-off” trade where the relatively safer US Treasuries get all the love while MBS are left out in the cold.  The next consideration is that it looks like MBS yields may be predisposed to not go much lower than that 3.3-3.4 range regardless of how pitchy things get in Treasuries.  This has ALSO been strikingly evident in recent sessions where MBS have held steadier than their benchmark big brothers.

Here’s another way to look at it which is effectively the same chart, expressed a different way.  The following chart is of the actual spread levels (MBS yields minus 10yr yields), and with a longer time frame.  To say that spreads have blown-out into the bond-market rally and risk-off environment would be a bit of an understatement.

Once again, that chart is MBS yield minus 10yr yield.  Please do let me know if any additional clarification would be helpful in considering these charts, and have a great weekend. 

Also!  Don’t miss yesterday’s big ‘ol chart-tastic round up: Major Update On MBS, Treasury, and Stock Market’s Long and Short Term Developments.  I had fun putting it together and hope it helps.  Still very pertinent today, sans short term charts.

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