VMBS - U.S. MBS Agency Performance September 2022: MBS Records Worst MTD Performance In A Losing Battle To Interest Rate Hikes
Summary
- In what was an especially turbulent month past, the MBS market recorded back-to-back underperformances for the first time all year.
- September fared its worst of 2022, and the worst of all time, besting July 2003’s great Refi wave (-153bps) and October 2008’s GFC (-163bps).
- MBS prospects for forward mortgage rates are higher and, absent the Fed, spreads portend wider.
By Albert Durso, senior RMBS and CMBS strategist, Yield Book
In what was an especially turbulent month past, the MBS market recorded back-to-back underperformances for the first time all year. September fared its worst of 2022, and the worst of all time, besting July 2003’s great Refi wave (-153bps) and October 2008’s GFC (-163bps).
Federal Reserve interest rate hikes and concurrent global central bank moves have rallied U.S. Dollar, destroying all else in its path. MBS prospects for forward mortgage rates are higher and, absent the Fed, spreads portend wider.
The removal of the Federal Reserve from the MBS market left remaining buyers to pick and choose entry points, rendering volatile sessions largely unsponsored.
The MBS index lost -169 bps versus the riskless Treasury index and -195bps spread advantage. The lower stack suffered the most along 30yr 1.5%s through 3.5%s, with “belly” 4%s through 5.5%s less dented, with prices resetting lower allowing for 6% and 6.5%s to reenter the conversation (however unsupported they were in issuance/supply).
The NYFRB MBS purchase operations ceased on September 14 th , in response to calls for reducing their balance sheet. As of September 21, 2022, the SOMA balance sheet showed $2.7 trillion in Agency MBS in position. Paydowns will no longer be reinvested into MBS (instead to U.S. Treasuries).
Originator selling increased this past month to $2.7B per day (vs. $2.6B in August), now dominated by 30yr 5.5%s and 6%s as the mortgage rate nears 6.5%. Purchases are fast replacing refinancing into rising rates. Spreads gapped wider into month’s end, with selling noted from Money Managers and REITS, as Real Money awaits calmer entry points.
Dollar Rolls were tame and nondescript, as limited CMO deal interest failed to fuel the bid while cost of carry/break even profiles have been dented against rising funding levels. Specs have also been worse for wear set to the backdrop of an inverted yield curve and higher overall interest rates (less protection needed).
During September, the current coupon (par based) rose as dramatically as did 10yr rates, which climbed 58 to 3.83% as the 2s10s curve flattened/inverted to -45.40. For the 30yr CC that measure moved +101bps to 5.641%, OAS spreads widened 20bps (50.77), ZV spreads +20bps (160.6), and vs. the 5&10yr treasury blend +30bps to 172.3.
Year to date, results remain eye-popping as follows; 30yr CC higher 359 bps, OAS levels 64bps higher, ZV +110bps and vs. the 5&10yr treasury blend +105.2bps.
With the entire MBS coupon stack resetting several points lower, we felt it important to offer a Yield Book model glimpse of what is exactly transpiring in the TBA (To be Announced) market. The TBA market is the benchmark from which most all MBS products price (Agency and Private Label alike).
In the grid above, the entire coupon stack is well below par ($100), and WALs (Weighted Average Life) are about 10yrs. Spreads have widened precipitously, as alluded to when quoting the MBS index performance in aggregate.
By coupon, lower stack with falling prices and less optionality looks to be almost “fully extended” in duration (i.e., further moves lower in price won’t add to WAL materially). Not to be completely gloomy but, widening OAS and spread levels tend to attract relative value buyers that effectively “police” the stack and keep spreads in line generally.
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U.S. MBS Agency Performance September 2022: MBS Records Worst MTD Performance In A Losing Battle To Interest Rate Hikes