| Wednesday, June 22, 2022 | ||||||||
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MANAGING DIRECTOR: |
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US Treasury Market |
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| Date | 1 mo | 3 mo | 6 mo | 1 yr | 2 yr | 3 yr | 5 yr | 7 yr | 10 yr | 20 yr | 30 yr |
| 06/14/22 | 1.19 | 1.83 | 2.43 | 3.15 | 3.45 | 3.60 | 3.61 | 3.60 | 3.49 | 3.72 | 3.45 |
| 06/15/22 | 1.21 | 1.74 | 2.32 | 2.93 | 3.20 | 3.35 | 3.38 | 3.39 | 3.33 | 3.64 | 3.39 |
| 06/16/22 | 1.19 | 1.59 | 2.24 | 2.88 | 3.14 | 3.33 | 3.35 | 3.36 | 3.28 | 3.59 | 3.35 |
| 06/17/22 | 1.15 | 1.63 | 2.25 | 2.86 | 3.17 | 3.35 | 3.34 | 3.34 | 3.25 | 3.55 | 3.30 |
| 06/21/22 | 1.08 | 1.70 | 2.46 | 2.92 | 3.21 | 3.35 | 3.38 | 3.39 | 3.31 | 3.63 | 3.39 |
Source: U.S. Department of the Treasury, as of 6/21/2022
Focusing on the Mortgage Market
The housing market is likely to be a popular topic of conversation this week as many of the key metrics for the industry are slated to be released. The National Association of Realtors got the ball rolling on Tuesday with Existing Home Sales data. The month of May saw sales fall to an annual rate of 5.41 million homes, which is a -3.4% month-over-month change from April. Additionally, the median price of existing homes continued its rise to a new high of $407,600. The remainder of the week will see the Mortgage Bankers’ Association Mortgage Applications and the U.S. Census Bureau’s New Home Sales released today and Friday, respectively.
In addition to the releases this week, mortgage rates continue to climb. The Freddie Mac 30 year fixed rate mortgage index is updated weekly and showed an average rate of 5.78% last Friday. The combination of these factors could eventually find its way into the mortgage backed securities market as the new mortgages are sold and packaged together into pools. We will likely see more and more 30 year pools with higher coupons issued since the rates on the underlying mortgages are high.
When buying and managing a mortgage backed securities portfolio, it is important to remember how mortgage back securities behave in different stages of the interest rate cycle. Pools with high coupons and relatively large loan sizes are more likely to experience high prepayments due to individuals refinancing if and when interest rates fall. For example, 2020 and 2021 saw huge increase in MBS issuance that was a result of home owners refinancing higher rate mortgages issued when the Fed raised rates in ’17 and ’18.
Regression analysis on US Treasury notes currently shows all tenors 2 standard deviations above their 10 year means. Keeping in mind the last 10 years saw interest rates at historic lows, current regression suggests rates will return closer to their means in the future. It does not tell us when this move lower may happen, but it does indicate they are relatively high to recent history.
The purpose of this information is NOT to serve as a bold rate prediction saying the next move in rates will be down. By most indications, the Federal Reserve is likely to continue hiking the Fed Funds Rate in the coming months. However, this data can act as a reminder for bond portfolio managers. It is advantageous for banks to purchase plain, vanilla, and understandable agency TBA eligible pass through securities close to a par price. Avoiding high premium products provides yield stability through interest rate shocks. Even if rates continue to rise in the near term but fall years from now, high premiums are not likely to be fully amortized and yields will suffer as prepayments come in at par. Low loan balance agency pools also provide more of a “what you see is what you get” yield because the incentive to refinance decreases the smaller the loan, even in falling interest rate environments.
Please reach out to your CCB representative if you have further questions on mortgage products.
This information is intended for institutional investors only. The material provided in this document/presentation is for informational purposes only and is intended solely for private use. Past performance is not indicative of future results. This material is not intended as an offer or solicitation for the purchase or sale of any financial instruments.
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