Mortgage basis tightened following yesterdays CPI and Fed decision. 2-4.5s performed the best with 5-5.5 slightly tighter and 30yr 6-6.5s essentially unchanged.
Since the start of June, the market has felt like it was on hold with little trading opportunities. We had some flashes of widening into the end of May, but since the wides, the mortgage basis has been a one way train tighter.
We come in this morning leaning net sellers of lower CPNs and belly. This is heavily based around the fact that little has changed around the narrative of slower consumer spending, falling inflation, and clarity around rate cuts into the back portion of 2024.
For almost the entire year, mortgage basis has found sellers when basis has reached ~44-45bps on the Agg. This has been especially true when credit has failed to tighten in the same period. Below is Credit-MBS OAS in the agg. We saw this exact set up in March and May which was followed by selling of the MBS basis to bring the relationship back into range.
Fed is stuck between this 25-50bps cut scenario for the rest of 2024. Some would argue if inflation data wouldn't have been the same day, Dot plots would have been lower into the end of 2024. This narrative in our mind fails to give the Basis the catalyst it needs to break this trading range. It likely further supports fading the belly and lowers and moving UIC to collect near term carry
In the simplest form, assuming 30yr 2.5s remain UNCH vs hedges for the next 6 months, 30yr 6s would need to widen 18.75 to be in the same spot given the carry in that 6 month period. Extreme case but pushes OW 5.5-6.5 and neutral/reducing OW in 2.5-5s.
|
CPN |
carry |
6 months |
|
2.5 |
-2.875 |
-17.25 |
|
6 |
0.25 |
1.5 |
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