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Which MBS Coupon Now?

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While the economic data to come and next week’s Fed announcements will still likely push bonds to new high yields this year (i.e. more than a decade above June’s high of 3.498). , they are doing their best to defend. The ceiling so far this morning. This is all the more pronounced given the rise in core inflation at the wholesale level according to the PPI data.

Not only notable, but not entirely surprising given that we expected the short end of the yield curve to be hit hardest by this week’s inflation exposure. In fact, his 2-year yield is still higher this morning, even though the 10-year yield has entered positive territory. This reflects the movements of the Fed Funds Futures over the past 24 hours. Rate hike odds were up more than 0.1% at next week’s meeting and a quarter of a percentage point higher by the December meeting.

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In a mortgage-specific development, this week’s spike in interest rates raises questions about UMBS coupons, which originators should watch out for in terms of their impact on loan rates. That question raises a question of its own: Do you want to know which coupons are most relevant to outright prices at a particular point in time, or how rates change most during the day? Do you want to know the movement of coupons that tell you?

UMBS coupons can match rates between 0.25% and 1.125% higher than the coupon itself. For example, a 5.0 coupon can include a note rate of up to 6.125%, but just because it quotes rates in the range of 6.25-7% depending on your scenario does not mean you should follow the 5.5 coupon. There is no limit. In fact, even a 5.0 coupon is still not the best choice. It may seem counterintuitive, but the issue is liquidity. At any given time, the 5.5 Coupon price is exactly what it should be or about 0.5 points too low.

For the 5.0 coupon, the difference is a bit smaller when the average bid and ask price is 12bps, but it is clearly narrower for the 4.5 coupon at 9bps. It’s still the sweet spot for now, but if rates stay in the current territory longer, the 5.0 coupon makes more sense.

The following chart shows the liquidity breakdown from 3.5 coupons to 5.5 coupons. Clearly, the 3.5 and 4.0 coupons are even more liquid than the 4.5s over the past few days, but that liquidity is a function of market depth (there are tons of these MBS in circulation). seconds.

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