Biden and McCarthy Reach Debt Ceiling Deal - House Set to Vote on the Bill

Minneapolis, MN | June 1, 2023 | By: John Trefethen, Director & Co-Founder

Table of Contents:

Market Moving Headlines
Interest Rates
Currencies
Commodities
Concept of the Week: Risk versus Speculation
Quote of the Week

Market Moving Headlines: Biden and McCarthy Reach Debt Ceiling Deal

Biden and McCarthy reach debt ceiling deal - House set to vote on the bill
The number of job vacancies in the US unexpectedly increased by 358,000.
The Dallas Fed general business activity index for Texas’ service sector falls more than forecasted.
Chile industrial production contracts for third month.
Canadian GDP growth stronger than expected.
The euro continues to weaken on cooling inflationary pressures.
German inflation rate declines to 6.1% year-on-year in May 2023.
Steel rebar futures approach a 3-year low.
Oil prices fall nearly 11% in May 2023.
Palm oil sinks to 9-month low.
US mortgage rates are the highest since November 2022.

Interest Rates

Currencies

Commodities

Concept of the Week: Hedging Mortgage Servicing Rights

Mortgage servicing rights (MSRs) are fees earned by mortgage originators to service a sold mortgage loan. This often includes collecting payments, managing escrow accounts, and handling customer service. Selling the loan and retaining the MSR creates an asset for the institution whereby the institution retains a portion of the loan interest payment in exchange for servicing the loan.

Rate movements impacting mortgage payments will dictate the MSR fees earned from the loan. Changes in MSR earned income can be noticeable in a volatile interest rate environment. MSRs can be hedged to make the interest income earned more predictable and stable.

The steps to hedge MSRs will often include the following:

Determine your exposure: Quantify the interest rate exposure of the MSRs. Assuming the risk is meaningful, then one would move on to the next steps.
Choose an appropriate hedging instrument: For hedging MSRs, this is often interest rate swaps or Treasury futures.
Determine the appropriate hedge ratio: This is the ratio of the hedging instrument to the MSR portfolio. This appropriate ration will be dependent on factors such as the duration of the MSRs, the interest rate sensitivity, and the institution’s risk tolerance.
Execute the hedge: For interest rate swaps this will require finding a counterparty willing to trade with the organization. For Treasury futures, these can be traded on an exchange.
Monitor and adjust: Continuously monitor the performance of the hedge and the underlying MSRs. Adjust the hedge position as needed based on changes in interest rates and the behavior of the MSR portfolio.