Liquid Much, Mortgages?

Read earlier today about a jump we’ve seen in mortgage rates:

Mortgage rates soared higher in the latest mortgage survey released this morning. The average contract 30 year mortgage rate is now at 5.31 percent, up considerably from last week’s average mortgage rate of 5.04 percent. Average mortgage discount points decreased to 0.64 points from 1.07 points according to the Mortgage Bankers Association’s Weekly Mortgage Applications Survey.

via Mortgage Rates Soar: 30 Year Mortgage Rates at 5.31% @ Rates Mortgage.

24 bps in a week?  Are you kidding?  At the same time we read this in Bloomberg:

The yield on the 10-year note fell eight basis points to 3.87 percent at 4:14 p.m. in New York, according to BGCantor Market Data. The yield slid as much as 10 basis points, the most on an intraday basis since Feb. 23. The 3.625 percent security maturing in February 2020 rose 21/32, or $3.75 per $1,000 face amount, to 97 27/32. The yield touched 4.0095 percent on April 5, the highest level since Oct. 16, 2008.

via Treasuries Rise as Note Sale Draws Strongest Demand Since 1994 – Bloomberg.com.

Earlier this week, I wrote about the correlation between 10yr Treasuries and 30yr mortgages.  Because conforming mortgage rates are linked to 10yr Treasuries, the divergence in the direction of rates/yields is significant.  So there has to be a driver – or multiple drivers – behind the bid flow and price action we’ve seen over the past few weeks.

To me, it makes me wonder if part of the sell-off we saw in the 10yr was rotation into the new on-the-run issue.  If that’s the case, I wonder what investors in the long end of the curve feel about current liquidity in the market.  It makes me think they don’t see enough liquidity, and that says something in and of itself.

In my earlier piece on Treasuries and mortgages, I was also wondering if we were seeing banks trying to get more liquid at quarter end, which necessitated selling Treasuries because mortgages were not going to be liquid.  And as I pointed out then, it looks like banks have been bidding in concert with the Fed until recently, which coincides with the Fed ending its MBS purchasing program.  And their holdings of Treasuries has increased as well.

We need to get something straight: mortgage rates are going to embed more risk premiums and those premiums are going to be bigger than before.  Credit risk premiums will rise.  Liquidity premiums need to rise.  While prepayment risks associated with mortgages will fall somewhat, it won’t be enough to negate the credit and liquidity premium increases we’ll see going forward.

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Filed under finance, government, macro, Markets, risk management, Way Forward

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