Morning Report – MBS spreads 6/14/13

Vital Statistics:

  Last Change Percent
S&P Futures  1632.7 1.8 0.11%
Eurostoxx Index 2654.8 -11.8 -0.44%
Oil (WTI) 95.66 -0.2 -0.23%
LIBOR 0.273 0.000 0.00%
US Dollar Index (DXY) 80.92 -0.031 -0.04%
10 Year Govt Bond Yield 2.21% -0.02%  
Current Coupon Ginnie Mae TBA 101.5 0.3  
Current Coupon Fannie Mae TBA 99.8 0.7  
RPX Composite Real Estate Index 203.4 0.5  
BankRate 30 Year Fixed Rate Mortgage 4.05    


Markets are higher this morning after a slew of economic data that was generally negative. Bonds and MBS are up.
In economic data this morning, the producer price index showed inflation remains in check at the wholesale level. Industrial Production and Capacity Utilization were lower than expected. Finally, the University of Michigan Consumer Confidence number fell. Yesterday, the Bloomberg Consumer Comfort Index fell, and the driver was people’s perception of their own financial situation. Perhaps the increase in interest rates is beginning to be felt.
Next week will be the FOMC meeting. Market participants will undoubtedly be focusing on the debate over tapering QE. Are they comfortable with the recent spike in long-term rates? 
Mortgage investors are starting to rotate to non-agency paper as rates rise. It is basically a bet that the housing market continues to improve. At the margin, it should put pressure on agency paper, which will increase borrowing rates.
We have already seen some of the effects of mortgage REIT deleveraging in the MBS space. The spread between Ginnie I and Ginnie II securities has narrowed, as well as the spread between Fannie Mae and Freddie Mac TBAs. Fannie Mae and Ginnie I TBAs generally trade at a premium to Freddie Mac TBAs and Ginnie II TBAs respectively. Why is this happening? Mortgage REIT deleveraging. The Ginnie Is and Fannie Mae TBAs are more liquid than the IIs and Freddie Macs. And when you are deleveraging, you sell what you can, not necessarily what you want to. Punch line?  Ginnie loans and Fannie loans are getting more expensive relative to Freddie loans. 
The MR will be spotty next week as I will be on the Left Coast.
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