Superstorm Sandy that hit the northeast early this week suspended trading in the bond markets for 1-1/2 days and in equities for two days.
The aftermath prevented many from being able to work due to various logistical issues such as electricity, connectivity, and transportation that were damaged in the storm. Some of these issues are expected to linger into next week as that region of the country continues to recover from the devastation.
Volume in MBS trading was at less than two-thirds of normal as a result of thinly staffed trading desks and the market shutdown. Meanwhile, mortgage banker selling averaged $2.6 billion, which was similar to last week, and down from the over $3 billion seen in the first half of October.
Supply largely comprised 30-year 3.0%s and this coupon was the laggard through much of the week. In addition to the weather-related impact, investors such as fast money were hesitant to take advantage of the cheapening due to election uncertainty.
This sentiment, however, turned on Friday's much-stronger-than-expected-employment report at 171k jobs versus an expected 125k, along with upward revisions to September and August totaling 84k, which stimulated a risk on trade. Lower prices drew in money managers along with the Federal Reserve, while fast money selling paused. At midday, 30-year FNMA 3s were leading on the stack at around 1/8 point tighter.
Fed gross and net MBS purchases for the week ending Oct. 31 totaled $13.4 billion. While it was lower than the previous week due to the storm, it stayed at a daily pace of over $3 billion. The Fed continued to buy less 30-year 3.0s and more 3.5s as it generally tracks the supply with 30-year 3.5s making up 22.5% of total purchases compared to 18.5% in the previous report; 3.0s slipped to 57.7% from 59.2%.
With 30-year 3.0s making up the majority of supply this week, there is the potential for 3s percentage to increase in the next report, with 3.5s slipping.
In other mortgage-related activity, trading in specifieds was quiet due to the storm events, but next week should see a pickup in originator BWICs with Class A (30-year FNMAs and FHLMCs) pool allocations next Friday. The 15s lagged 30s, partly due to the flatter yield curve, while GNMA/FNMAs were higher on 4s and lower and lagged up in coupon.
For the week through Thursday, Barclays MBS Index underperformed Treasurys by three basis points. For the month of October, excess return to Treasurys was negative negative 10 basis points with the year-to-date return at 104.
The 30-year current coupon yield was little changed over the week at 2.292%. However, the spread to 10-year notes widened two basis points to 56. From the Federal Open Market Committee's QE3 announcement in mid-September through Oct. 25, the current coupon spread ranged between 44 and 52 basis points; over the week since the spread has widened out to 57.
Next week's big event is the presidential election which is likely to limit volume in the early part of the week, with some amount of "knee-jerk" reaction anticipated once the results are known. If President Obama is re-elected, the initial response is for a rates rally and vol to decline, while a sell-off is seen if Governor Romney is elected president on uncertainty related to a new administration. In an Obama win, Fed policy is expected to remain accommodative following Chairman Bernanke's term expiration in January 2013, which is supportive for ongoing QE3 buying and low rates; however, it is expected he would replace acting Federal Housing Finance Agency Director Edward DeMarco with someone more amenable to principal forgiveness.
Meanwhile, a Romney administration is expected to place a more hawkish leader at the Fed helm in 2013, which brings uncertainty to how much longer after 2013 would QE3 continue and fed funds rates be held near zero. While this could pressure the basis in the short term, Bank of America Merrill Lynch analysts think cheapening would draw in REITs and banks as technicals would remain favorable through 2013.
Prepayment Outlook
The October prepayment reports will be released late afternoon on Tuesday. Prepayment speeds on 30-year FNMAs are projected to increase 10-15% on average and by around 10% on GNMAs. Paydowns are estimated at $145 billion from $133 billion in September, while October gross issuance totaled $132 billion.
There is the potential that speeds could be faster than expected on conventionals on a rush by servicers to close loans before higher guaranty fees go into effect on Dec. 1.
At the same time, there may be some impact from the superstorm Sandy, said Deutsche Bank Securities, albeit slight. This would likely be from postponed closings that would be delayed to November. They calculated that, at the very most, speeds might be 2 CPR slower than their projections prior to the storm; and as this is within normal forecast error, it may be hard to determine whether it was as a result of the storm.
The MBS analysts added that December speeds could also see some influence on delayed applications. This will be made more clear when the Mortgage Bankers Association releases its mortgage application survey next Wednesday.
