MBS Spreads Keep Tight Despite Collapse in Treasury Swaps
Fixed-income researchers at global financial services firm Credit Suisse closed out their tactical short recommendation on the mortgage-backed securities (MBS) basis after the spread between MBS bond yields and 10-year Treasury swaps swung out to 69bps this week. The spread is near its widest point in six months, researchers said in commentary provided to HousingWire. The 10-year Treasury coupon yield rose around 25bps to its highest level in 2010, causing Treasury swaps to collapse below zero, according to industry reports. There was concern the jump in Treasury yields marks the beginning of what could turn into a protracted bond market sell-off. But economists note the jump was more likely related to Wednesday's auction of 5-year Treasuries, which brought in unusually low demand. "Actually mortgage spreads are pretty snug," says Jack Donahue , a pass-through bond trader at global securities and investment banking group Jefferies & Co. "We widened out during the Wednesday/Thursday selloff but those lower dollars were met with broad based buying. Mortgages are considerably tighter today." Mike Baker, a trader in the New York office of Southwest Securities Group, said 2-year, 5-year, and 7-year auctions of heavily Treasury supply all saw poor demand. "We definitely saw some of the widening that the market has been anticipating post-Fed, albeit a bit early," Baker said. "This week saw a collapse in swap spreads and sovereign credit concerns that certainly spooked the market." Jim Vogel, a strategist at FTN Financial, a financial services provider for the investment and banking community, said swap spreads are remain at traditional lows. "Mortgage spreads to [US Treasuries] are remarkably well behaved given this week's whipsaw ride," Vogel said in e-mailed commentary. "And, quarter-end can't get here fast enough." By the end of Q1 2010 on March 31, the Federal Reserve will wrap up its purchases of $1.25trn in agency MBS. The Fed's forthcoming exit from the market has some investors concerned MBS spreads to Treasurys could blow out again from recent historic tights as the Fed's significant demand dries up. Vogel adds: "Between the necessary healing time post March 31, corporate earnings, and a raft of economic data, it could be April 15 before traders can comfortably say they have a handle on underlying fixed income flows." Write to Diana Golobay.