Morning Report: TBAs are decoupling from the bond market

Vital Statistics:


Last Change
S&P futures 2919 -96.25
Oil (WTI) 43.46 -2.49
10 year government bond yield 0.73%
30 year fixed rate mortgage 3.3%


Stocks are getting clobbered as the flight-to-safety trade takes hold. Bonds and MBS are up. Note we  will have a lot of Fed-speak today, so be aware.


Despite the big move upward in bonds (the 10 – year is up about 2 points), TBAs are barely up. The 2.5 coupon is up about 1/4, and the 3s and up are flat. There is a huge push-pull event happening in the TBA market right now.  First, originators who hedge their pipelines with TBAs are getting hit with margin calls, which is causing a bit of a short squeeze in the market. Basically, if an originator can’t make the margin call, the broker will close out their position, and that means buying TBAs to close out the short position. Most lenders have had a call from their friendly TBA broker-dealer already, and you will probably be able to hear the champagne corks popping after we get past Class A settlement next week. People have been white-knuckling it all week.


On the other hand, increasing prepay speeds are making the higher note rates less and less attractive. If you buy a 3.5% Fannie TBA, you’ll pay 104. You will get back 100. You are hoping that you get enough coupon payments to cover that premium you paid. As rates fall, that chance of making back that 4% premium you paid becomes less and less. So, even though the 10 year keeps falling, eventually mortgage backed securities will participate less and less in the rally (or at least the higher note rates will). And it looks like we are about there. This is a big relief for mortgage bankers who have full pipelines and want to ring the register. Now, about that servicing portfolio….


Margin calls harken back to the bad old days of 2008. Are we experiencing something similar? Emphatically, no. In 2008, we had a collapsing residential real estate bubble, and these are the Hurricane Katrinas of banking. Despite all the fears of a recession, delinquencies are at 40 year lows, and the labor economy remains strong.


Speaking of the labor economy, it is jobs day. Jobs report data dump:

  • Nonfarm payrolls up 273,000 (expectation was 177)
  • Unemployment rate 3.5% (expectation 3.6%)
  • Average hourly earnings up 0.3% MOM / 3% YOY
  • Labor force participation rate 63.4%

Overall, a strong report that should take some wind out of the sails of the bond market. Note that this is February’s report, so much of it will be pre-Coronavirus. US corporations are preparing for a mass experiment in remote working, so some of the effects of virus could be relatively well mitigated.


Remember yesterday, when I showed the Fed Funds futures prediction and said it was a toss-up between how big of a cut it will be? Well, it still is. Except now it is a toss-up between a 50 basis point cut and a 75 basis point cut. ZIRP by June?


fed funds futures


Who else is driving the rally in the 10 year? Banks. Banks who hedge their interest rate risk with Treasuries are facing similar issues that mortgage bankers are in the Treasury market. Banks with huge portfolios of mortgage loans will sell the 10 year against it in order to hedge interest rate risk. As rates fall, they will need to buy back some of that hedge. According to JP Morgan, banks need to buy about $1.2 trillion in 10 year bonds to adjust their hedges.

42 Responses

  1. That was a great report, Brent. Thanks.

    Meanwhile, listening to Sports Radio in the car, the Austin guys played a clip from what must be an MSNBC show with Brian Williams, the helicopter guy who got fired, I thought, years ago. If it wasn’t doctored, he said Bloomberg’s $500 mil was a million for every person in America, with some left over. The sports guys were laughing and I was steering the car, sort of, while joining in.

    Does anyone know if that was real? If so, we have an early candidate for a Darwin Award in math.

    Addendum: a lawyer friend in Michigan just told me it was real.


  2. Re: the emergency supplemental:

    The $8.3 billion package includes $7.8 billion in discretionary appropriations, plus $500 million in Medicare telehealth mandatory spending, which would allow Medicare providers to furnish telemedicine services to seniors.

    hmm. i wonder how that got in there.


  3. Things getting worse in Austin Mark, or is this just precautionary?

    “South by Southwest 2020 has been canceled because of coronavirus

    The Austin-based event, which attracts hundreds of thousands of attendees, is the first major arts festival to be canceled due to the outbreak.

    By Alissa Wilkinson and Aja Romano
    Mar 6, 2020, 5:04pm EST ”


    • Frankly, the world’s a better place when hipster douchebags are prevented from congregating.

      Liked by 1 person

    • not just there, i am seeing conferences being canceled left and right…


      • not just there, i am seeing conferences being canceled left and right…

        A lot of banks have already split their staff into teams and keep them separated by having some of them working from their disaster recovery sites or from home, to insure that not everyone gets infected at once.

        I think it is all overkill, but once someone starts this stuff, everyone else has to copy it.


        • I suppose an abundance of caution is appropriate until we have a better understanding of how this is going to play out. Here in CA, and really across the US, we have no idea how many actual cases there are because testing has been so spotty.

          I’m not personally worried about myself but Walter admitted to me this morning that he is afraid of getting it. His lungs are not that great and with his heart condition he’s not sure he would survive. He’s also worried about our daughter in SF (I am too).

          Anyway, we’re just going to lay low until we have more information. It looks like testing is finally going to ramp up this coming week with both LabCorp and Quest finally getting kits.

          I’m watching the confirmed cases go up every morning on a Map I’ve got bookmarked. My impression is that it’s pretty contagious but most of us will be fine if we get it.

          I was reading a report this morning from a zoologist who specializes in these type of viruses and his opinion is that the research needs to focus on a universal vaccine for all corona viruses that can be altered to meet each year’s new challenge, in the same way we treat the A/B strains of flu. He says there are more coming and we need to think ahead.


    • Well, the Rodeo hasn’t been canceled.

      Reality check: headliners for SSW wimped out in droves. It was going to be a pathetic shell of itself.

      Reality check: cowboys on the rodeo tour did not wimp out.

      So while there are no reported infections in Austin, the 125K persons from across America were not coming and the show got canceled. But the rodeo will last a week with lots of country music and BBQ and 40K folks from CenTex.

      Addendum: if you ever go to a BBQ cook-off, go hungry and sample early, because by the end of the day all the meat is dry as leather.


      • LOL Mark………….I live in “Horsetown USA” and we have rodeos and BBQ’s here too so I totally get it…………Cowboys and BBQ never give up and yes go early for the best food!


      • My experience with BBQ is limited to New York. I suspect I am missing out..


        • Haha Brent, it’s hard for me to imagine BBQ in NY. Pizza maybe, but not BBQ. We have BBQ drums on street corners here that you would die for.


        • FWIW, i find NY pizza highly overrated. But if you want Jewish deli – a pound of pastrami on rye, NYC is where to go…

          Liked by 1 person

        • Brent:

          FWIW, i find NY pizza highly overrated.

          Sitting here in London, I am craving NY pizza.


        • I love pastrami and I remember eating that with my dad. A pound would probably give me a heart attack though. 😉


      • Also, the LA Marathon is still going off tomorrow as planned and everyone is hyped up for it! We’re not just a bunch of whimps in CA!


      • I was looking into going to the Monaco F1 Grand Prix in May this year, but as it was being organized as a cruise out of Spain, my friends and I decided to punt.

        But as an alternative we may be coming to Austin instead for the United States Grand Prix in October.


        • Yeah, a cruise is probably not the best idea for now.

          I spoke with my trainer at the gym yesterday and he said that I should probably workout from home for awhile. He knows I worry about Walter and he thinks the virus might have hit the gym last week. He’s finishing up nursing school so has a little insight I guess. No confirmation of course, and it could still just be the seasonal flu going around, but they are deep cleaning and warning folks to use the anti-bacterial spray on equipment before and after use. I generally do that anyway and wouldn’t normally consider staying home.

          I’ll take his advice for now in an effort to keep the germs out of our house. I haven’t heard of any local cases but we really haven’t heard much about test kits here either. I’m trying to follow reliable information such as the CA Dept of Public Health website and the map I have that is updated everyday. There doesn’t appear to be any stockpiling of supplies going on here. I was at the grocery store yesterday and everything seemed fine. Walter generally does the grocery shopping but for now we’re limiting his exposure. I have heard that places like Costco are being stripped of some things…………….such as toilet paper and hand sanitizer but can’t confirm that.


        • I was at a Costco in Houston yesterday and all seemed well. The only aberration were two people disinfecting all shopping carts, which I thought was thoughtful.

          The guy across the street took
          His wife and three kids to the Stock Show and Rodeo yesterday, stayed all day and then went to the concert, some hick singer I’ve never heard of. Wasn’t worried at all about Carona.


        • All hand sanitizer in Austin is gone, and it is hard to find 91% alcohol. But I got some 91% alcohol at the Walgreens along with glycerin and aloe vera to make a project for the twin granddaughters.

          The University had cancelled its annual Open House that draws 60K kids from all over TX and which is my granddaughters’ big time fave every year. So they wanted a substitute. Thus Project Hand Sanitizer. After we bought our supplies, we mixed many little plastic dispensers 3/4 alcohol [and thus over 60%, allowing that it was not 100% pure to begin with] and the rest a mix of glycerin and aloe.

          They added scents to each bottle except mine and now we all have a lengthy supply of homemade sanitizer, some of which smells like lemon, and some of which smells like various florals. And mine, the real man stuff, which just smells like alcohol.


        • We will surely know by October if Austin is open for biz.

          That is a great venue, btw. Far SE edge of the city, near the airport, so where you stay gets to be a situation to plan for if you also want to do anything else.


        • Mark, I love that you made it into a fun project for the girls. Sounds like something I would have done. TX is getting some of the folks from that cruise ship, GA also, but the bulk will be quarantined here in CA since approximately 1000 of them are from CA.


  4. For the first time in over 3 years I kind of like VP Pence. He’s got a tough job countering Trump’s false claims and assertions re COVID-19. It’s nice to see someone taking his job seriously.

    WASHINGTON — Friday evening found Vice President Pence in an uncommon and uncomfortable position: Having to downplay and contradict assertions made by his boss. It proved a delicate act for Pence, who has become the face of the administration’s coronavirus response, and who has sought to project an aura of steely confidence.

    Pence tried to do so cautiously, aware that Trump is sensitive to any efforts to upstage or contradict him. Speaking of the coronavirus testing regime, which has been mired in confusion, Pence admitted that “we have a ways to go yet.” About 2,500 kits have been shipped out to laboratories. That means that 1.5 million tests are available. Because of testing protocols, however, those tests can be administered to only about 500,000 people.

    In an implicit rebuke to Trump, Pence said it would be a “matter of weeks”

    before the tests would be “broadly available.”

    Pence also addressed the issue of the Grand Princess. He said that 21 people on board the cruise ship have been infected with the coronavirus. Ignoring Trump’s complaints about infection statistics, Pence said he and California Gov. Gavin Newsom had “developed a plan” to have the ship dock at a “noncommercial” port.

    “Those that need to be quarantined will be quarantined, those that require additional medical attention will receive it,” Pence said. Food and Drug Administration Director Stephen Hahn added that test would “available significantly” by the end of next week.

    On Thursday, Pence visited with Washington Gov. Jay Inslee, whose leadership he has praised since the state became an epicenter of the coronavirus epidemic, despite Inslee being a Democrat often critical of the Trump administration.

    In his remarks in Atlanta, Trump offered his own thoughts on Inslee, calling him a “snake.”

    Pence was later confronted with that statement at the White House briefing, but the vice president ignored the question. In the course of the briefing, Pence also effusively praised Newsom, the California governor, who is another Trump nemesis.


  5. What does this say about Democratic Party?


    • Not sure I generally understand your comments McWing…………wish I did because I think they’re probably funny and I love a good laugh!

      2016, it seems like it must have been more than 43.6% of R’s voted for the white male since Trump eventually won………….right?

      And 2020, keep in mind we had 3 old white guys, 2 women and a gay guy running which split the vote up…………..he’s right unfortunately, probably about 80% or more will vote for one of the old white guys left. We don’t really have options here.

      Keep in mind though that the Dems voted in an African American with a weird name in 2008 and 2012 and a woman won the popular vote in 2016 even though she just isn’t that popular! Can R’s beat that?


      • lms:

        Keep in mind though that the Dems voted in an African American with a weird name in 2008 and 2012…

        Their only other choice was a woman, so they had no old white guys to pick from.

        …and a woman won the popular vote in 2016

        There is no such thing as the popular vote in Presidential elections.

        Liked by 1 person

        • Their is such a thing, it just doesn’t matter.


        • lms:

          Their is such a thing…

          In exactly the same way that there is such a thing as the total runs contest between the American League champion and the National League champion every October.


        • Sure there is. It’s a very big poll that includes all the undocumented immigrants in California so it makes Democrats feel better! 😉


  6. Looks like they’re taking people off the cruise ship tomorrow after docking it in Oakland. They’re all going into quarantine or those who are sick, hospitals, depending on how sick they are. 1000 of them are Californians and will be going to two different military bases here in CA. The rest are going to military bases in TX and GA. Those from other countries will be repatriated at some point, not sure how that will work. The crew is being quarantined on the ship.

    Interesting times.

    Liked by 1 person

  7. If confirmed, Ratcliffe will not only have to allay public concerns about the politicization of intelligence during an election year, he’ll also have to strike a delicate balance inside the administration between a demanding president seeking to rein in the “deep state” and intelligence agencies that have long resented and resisted any perceived overreach from ODN.

    Doesn’t the paragraph repudiate the need to put “deep state” in quotations?

    Not sure he really understands that this isn’t the endorsement he thinks it is.

    But, he said in an interview, the office “went through an evolution from 2004 through four directors,” reaching maximum effectiveness under James Clapper, who served as director of the Defense Intelligence Agency and the director of the National Geospatial-Intelligence Agency before taking over as DNI in 2010.
    “Clapper figured out the secret,” McLaughlin said. “Let the agencies do their jobs and do only the things that the DNI alone is empowered (and authorized by the president) to do — mainly shaping the budget, coordinating tasking, briefing the president and Congress.”

    Shouldn’t the Executive branch control the agencies within it?

    How a Ratcliffe-led ODNI will view its responsibilities, however—and how Trump will empower the office as he seeks to tighten his grip on the intelligence community—is anyone’s guess.

    Unlike the previous partisan director?

    What vexes intelligence veterans most, Priess said, is the prospect that a partisan director like Ratcliffe might take an active role in managing the President’s Daily Brief instead of letting analysts do their job — substituting his personal opinions for the consensus view of the $70-plus billion intelligence community.

    We should be so lucky.

    “That’s the kind of thing that could prompt resignations of senior officials within the agencies,” Priess said, noting Ratcliffe’s status as an outsider will make it more difficult to establish trust with the career officials.

    We know, it’s already happened.

    “All of the legislative affairs offices in the intelligence community coordinate with, and often work through, ODNI legislative affairs,” the former official said. “So with a very partisan DNI, there could be some risk that you end up with a partisan shaping of what information goes to Congress.”

    I love how they write as if Clapper was a straight shooter. Breathtaking.


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