Divergent “Tsunami Twister" Curve Swells Again (02/28/23)
The rate complex sold off again, with the short end of the curve edging up as the Fed raised another 25bps in February, and forwards hint at the next hike. Meanwhile, note/bond yields rose by 30-60bps, making 2s/10s invert to -89bps at month-end. The divergent front-vs.-back “tsunami twister” curve continues to ravage valuations and funding costs. For example, the 6mth part of the curve is currently the high point at 5.17%, while the 10yr ended Feb. at 3.92% for a negative 125bps disparity. The twisted curve with localized vol continues to make risk/reward value challenging; looks like the market is going to have earn its money the old-fashioned way with carry as king, and CRT floaters right now have relatively big coupons, which may be getting bigger soon…
The Great About-Face Rolls On Into 2023 (01/03/23)
2022 was a tough year, with bond and stock market returns down significantly YoY, including a sell-off in the past few closing weeks, just to add insult to injury. The hallmark of the year was the speed and magnitude of the Fed’s rate policy reversal away from zero in response to extraordinary inflation, and the ensuing market repercussions. It seemed like years of net accommodative monetary policy, massive artificial market support, and rising valuations was unwinding in an instant. The myriad of beginning-of-year vs. end-of-year U-turns included:
• Much higher vs. lower rates
• Much higher vs. lower volatility
• Much higher vs. lower goods/service prices
• Much higher vs. lower spreads
• Much lower vs. higher CPRs
• Much higher vs. lower mortgage durations
• Much lower vs. higher HPA rates
• And the list goes on and on….
But, as the old adage goes, “there’s always next year” and now that 2023 is upon us, sectors across the board, including CRT, get a chance to reset for the new “season”. While this year starts off on more of a back foot, so far for CRT, employment has been resilient, and today’s housing and mortgage credit fundamentals are of a relatively stronger ilk than previous cycles. And we’ve seen this before: 6%-7% mortgage rates, slow speeds, etc. Perhaps things are going back towards a historical, natural “normal”, vs. what had been an artificially induced “normal” for quite some time…
CRTx® Index Basket: FEB 2023 Factor Updates (2/27/2023)
CRTx® AGG principal paydown+tender percentage was 2.45% of Feb. basket UPB vs 0.58% paydown-only in Jan:
$ 272 million in paydowns
$ 989 million in tenders
$ 397 million in coupon payments
+5.4 bps to Feb. CRTx® AGG total return due to paydowns/tenders.
Class C/Es inch higher
Aggregate 1st-loss B-piece index realized write-downs/shortfalls total return hit -2.5bps for Feb.
Feb. factor speeds fell even further, ~1 CPR for STACR (seasoned range now ~3- to 7-handle CPRs).
Total DQ%s and 30d DQs turn slightly lower MoM, while 180+ DQ #/$ shrink again MoM.
9 reference pool groups continued to fail their DQ Test in Feb., same vs. Jan.
LIBOR resets +11bps, SOFR resets +17bps.
LATEST CRTx® Index Rebalancing Metrics (3/1/2023)
CRTx® and RSKFREx™ Index Suites Now on Refinitiv
The CRTx® (Credit Risk Transfer Return Tracking Index) suite, including daily historical index levels, periodic returns, and month-end rebalancing risk/reward metrics, and the new RSKFREx™ Index and Rate suite, are now available on Refinitiv™ (a London Stock Exchange Group company) fixed income data products, including the Eikon terminal and the DataScope Select data delivery platform:
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