Phil is the Chief Operating Officer MCTsand is recognized as a capital markets thought leader within the mortgage banking community.
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The secondary mortgage market is frequently affected by developments in the US Treasury market, which has been particularly volatile over the past year. Both long-term concerns and daily news and releases, such as high consumer price index announcements, broader concerns about inflation, concerns about how the Fed is coping, certain Federal Open Market Committee (FOMC) meetings, job numbers, etc. contributed to the turmoil in the government bond market. These factors directly affect mortgage interest rates and influence mortgage transactions.
There are growing concerns about future volatility in the mortgage-backed securities (MBS) market, which works closely with the government bond market. For the first time in 14 years, the Fed has moved into a period of qualitative tightening and is not participating in the Treasury market space. Lenders, traders, and consumers alike are uncertain about the future of the economy, the primary and secondary mortgage markets. Here are some tips to help reduce risk and navigate the market during times of market volatility.
Cost savings and efficiency are two key factors associated with uncertain times. Beyond changing or reducing headcount, there are many approaches to achieving cost savings and efficiencies. Overall, a consistent and disciplined approach pays off in the long run. While volatility shouldn’t lead to drastic changes in policy, there are some strategies to keep in mind when considering potential volatility on his MBS side of the market. they are:
• Maintain a dynamic hedging strategy.
• Invest in software.
• Explore and utilize a variety of delivery methods.
By doing these things, we reduce the functioning and impact of the financial markets as much as possible while protecting our margins.
Maintaining a dynamic hedging strategy is critical in trading coupons in liquidity-dependent secondary markets. Liquidity requires stability. This is something that is often lacking in volatile markets. Here are the options available to traders with coupons in volatile markets:
• Wait for cross-hedging and higher coupon liquidity.
• Rolling higher coupon costs.
• Swap trading as an exit strategy.
• Consider assignment of trades (AOT) to reduce bid-ask exposure and limit exposure to market costs.
• Stay on top of production and rollout of non-production trading coupons to reduce basis risk exposure.
• Beware of unusually wide bid-offer spreads.
By considering these factors in coupon trading, you can gain more liquidity and potentially preserve your profit margins to avoid the dangers of volatile markets.
Another strategy for success in volatile markets is to consider investing in software tools specifically to manage volatility. Various companies offer solutions to enhance and maintain pipelines and generally improve efficiency. In times of uncertainty, it is beneficial to have more options, a larger pool of potential investors, and tools to cut down on paperwork. Every second counts, every basis point counts. It can be important to consider investing in technology that can save you time and money and offer new opportunities to maximize your return.
Finally, it is imperative to explore and leverage a variety of delivery methods that are executed during periods of high volatility. It has a large number of execution outlets and can benefit from trying to get more out of them. For example, AOT is an option that not only saves lenders money during a dramatic upturn, but also helps sell loans. For example, cash forwards from settlements can be brought into the basis of loan prices. AOT eases bid-ask spreads, limits exposure to market costs, and helps maintain profitability. Many successful traders employ this strategy (behind a paywall) as it is clear that they can make a profit during this volatile time.
Market volatility can be a threat, but there are proven strategies you can leverage to maintain profitability and keep the impact of the government bond market as far away from the MBS market as possible. Maintaining a dynamic hedging strategy, investing in software tools, and seeking out and leveraging different delivery methods are all sound practices and consistent with the usual, consistent approach to reducing trader volatility. It helps you succeed in the market.
The information provided here is not investment, tax, or financial advice. Please consult a qualified professional for advice regarding your specific situation.
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