Mortgage Strategy Monthly Report

Walt Schmidt, Alexis Vilimas, and Brandon Messing
The Fed's Final Day Revie

During the recent, and still ongoing, transition of the Fed from Quantitative Easing to Quantitative Tightening, the MBS market has undergone some significant changes. This article explores these changes to ascertain whether the Fed is leaving the market where it found it before the onset of the Covid-19 lockdowns.

Relative Value in Relative Speeds
The prepay differential between discount coupon Ginnie Mae MBS and conventional MBS has been converging slightly in recent months due to a decline in cashout refinancing and lower buyout activity. The following analysis will review the drivers of Ginnie turnover speeds and set expectations for Ginnie speeds relative to conventional going forward.

Market Update

Mortgages have underperformed treasuries during September. Lower coupons have lagged the middle and upper portions of the coupon stack month-to-date. The 30yr mortgage rate is currently 6.08%, which is a 50bp increase from the middle of August. CMO spreads are mostly wider. Prepays were flat during August. An elevated mortgage rate during the month offset three more business days and seasonal trends. Speeds in the lower wing of the coupon stack were slightly faster while higher coupons slowed during August. 30yr conventional was faster by 1.7%, 20yr conventional was faster by 2.2% and 15yr conventional was faster by 2.9%. Speeds for the Ginnie Mae 30yr sector decreased by 2.5%.

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