da-kuk
By Albert Durso, senior RMBS and CMBS strategist
Up and Down month concludes an Up and Down Year
U.S. Agency Mortgages closed out the month on a sour note as earlier tightening was faded into year-end illiquidity. December did end modestly positive along the index, paring gains back to +29bps versus riskless Treasury curve and +33bps spread advantage.
To say the year was turbulent, would be accurate as the index posted alternate up and down months in sizeable figures. Starting in June, returns were either negative or positive in chunks of 75bps to 169bps movements. Bonds had a woeful underperforming year in 2022, with Total Rate of Return on the MBS Index -1189bps and -1325bps on Treasuries.
U.S. 10yr note yields rose +220bps on the year to 3.83% context, 2s/10s curve held its inverted stance at -54.90, managing to “steepen” 34bps from the opening 2022 lows of -88.90. Vols were particularly telling in performance, with peak levels of 152.90 denting MBS returns, while a late year easing of 30bps calmed the backdrop allowing mortgages to rebound into year-end.
Originator supply took a dramatic turn lower as new issuance fell 54% year over year in U.S. MBS Agency space. That translated into daily TBA hedging falling to $1.5B in December off the opening year highs of $5.4B in January, $4.1 in March and $3.2B in June. TBA hedging followed rates and mortgages as the dominant coupons started the year at 30yr 2.5%s and 3%s, ended at 5%s and 5.5s with trips as high as 6%s and 6.5%s.
Dollar roll markets and “carry” in general evaporated as the Fed kept raising rates and the bulk of the market traded at a discount most of the calendar year. Soaring funding rates overwhelmed precipitously declining prepayment levels with drops now just a couple 32nds after reaching as high as +30/32nds at one point this past year.
The coupon stack was “policed” by money managers and hedge funds at the tights (selling the basis at the “belly”), while real money supported the stack-but at their re-entry points not the subservient entry levels as was the Federal Reserve’s mandate.
MONTH TO DATE; Spreads closed out a relatively solid month, seasonally adjusted, as firming gave way to late year widening with liquidity thinned into holiday trading. 30yr current coupon, par based CMM, was relatively flat to 5.34%. OAS spreads the same at 9.51, while ZV measures widened 4.3bps to 130.8, and against the frequently watched 5&10yr Treasury blend wider 1.9bps to 143.05.
YEAR TO DATE: The basics for widening held overall, with 30yr CC levels rising dramatically by 329 basis points. The widening along OAS measures was 23.1bps, ZV +81bps and vs the 5&10yr treasury blend +75.9bps.
Market Perspective- TBA Stack OAS Performance
Market selloffs early in the year took OAS levels off their steamy perches and made the sector more attractive, ultimately. The negative spreads from Q122 were soon replaced by wider OAS spreads into the summer and fall, with only some semblance of normalcy needed to provide a floor and garner market support.
Along those lines, 3m10y Vols plunged the depths in summer and early fall as the backdrop to inflation and Fed maneuverings normalized somewhat.
From the TBA coupon stack below, OAS spreads veered positive by June, while buying in fuller coupon 4.5%s and 5%s in late fall took some of the “give” out of those formerly bloated coupons.
Also, from the chart above, notice the fate of lower 1.5%s, 2%s, and 2.5%s as their massive sell-off witnessed a total reversal on OAS levels. They gapped out 50 basis points off the opening year tights (negatives) to their current +30/+50 spread readings, not unrelated to price handles falling 15 points to a $77-$85 range (vs. $94-$100 in January 2022).
Given the present interest rate environment and extension risk weighing down that sector, it’s doubtful that those OAS spreads are shaved anytime soon.
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