DNY59
By Albert Durso, senior RMBS and CMBS strategist, Yield Book
The MBS market saw its performance steadily decline in the days leading into the month-end Jackson Hole Fed summit, as Vols ticked up and widening ensued. Mid-month tightening was overwhelmed by Fed Hawkishness as monthly performance continues to alternate.
With the Fed on hold and fly fishing until September’s next meeting, Vols started the month lower before a late spike left the MBS index back -83bps versus the riskless Treasury index and lost -90bps spread advantage. The worst performers were lower 30yr 1.5%s through 3.5%s, losers as rates started to back up into month end, while upper coupons battled current production either to a standstill or somewhat positive as shorter durations held some appeal.
The macro backdrop continued with an inverted yield curve of -5bps net on the month (2s/10s curve -34.8bps), rising 10yr yields (+52bps to 3.09%), and elevated 3m10y vols (+12.5bps to +122.90).
The NYFRB MBS purchase operations schedule decreased from $12.8B for the month to $7.8B, roughly $390 million/per day. This might be the final Fed MBS ops buying schedule, as the capped run-off takes over and the market operates of its own volition.
Originator selling ticked down to $2.6B per day focused on 4%s, 4.5%s and 5%s. Money Managers again propped the belly (3.5%s and 4%s), lower coupons thriving only into rallies while UIC squared off to supply. Asia also went UIC (“up in coupon) on swap, selling lower 3%s and 3.5%s, for fuller 4%s and 4.5%s.
Dollar Rolls have a rare, subdued month, with few coupons sticking out during a 48hr scramble to cover existing shorts. Only G2 4%s had any life, popping to double digits drop (10/32nds) while most all other Class C settlements were tamed.
For August, the current coupon (par based) steadily climbed as 10yr rates pulled all else along; MTD 30yr CC rose 88.9 basis points to 4.62%, OAS spreads widened 24.6bps to 30.2, ZV spreads 38.9 bps to 129.8, and levels against the 5&10yr treasury blend were out 31.3bps to 141.5.
Year to date, the picture is even more pronounced; 30yr CC higher 257 bps, OAS levels about double (+43.8bps), ZV +80bps and vs the 5&10yr treasury blend +74.4bps.
Year over year (July 21 to July 22), the picture follows the same pattern of widening as rates started the first climb to the next rates plateau rebounding off the Covid summer of 2020.
As we end the summer, we felt the need to scan the market and look at relative value across a wider swath of MBS sectors; Agency Pass Throughs, 15yrs/30yrs/20yrs, as well as structured CMOs and even Agency CMBS DUS. We focused on the cheaper end of the curve, 3-5yr effective duration.
In both scenario (+/- 200bps), 20yr FNCT 4%s held up the best, with limited extension on a sell-off, and modest shortening into a rally. There were one or two exceptions, shown above, while even tighter window and lockout 7/6.5 DUS paper always shines with positive convexity due to its narrow open window and quasi bullet-like structure. The tradeoff is they trade 40bps inside of 20yr paper.
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