FRM Update

March 15, 2021

Fed Support   

The Federal Reserve’s aggregate mortgage buying totaled $28.8bn last week.  The most heavily purchased securities were 30-year UMBS 2.0s and 30-year GNMA 2.0s with total volumes of $13.2bn and $5.1bn, respectively. The Fed has purchased over $1.7tn in MBS during this round of QE and currently holds $2.1tn, or approximately 29% of the entire universe. The Fed is currently buying $120bn of Treasurys and $40bn of MBS monthly.

Current Yield Spreads

The MBS sector has continued to perform well versus Treasurys during March. Last week nominal spreads on 15-year MBS tightened 8 bps to 49 bps, while 30-year spreads tightened by 6 bps to 73 bps. Despite the positive run during the last two weeks, spreads are 11 to 19 bps wider this year.

Trading Activity

The summary below reflects purchase activity from the previous week. Activity was led by UMBS  20-year 1.5s and 2.0s.

TBA-Eligible Securities:

Non-Deliverable Securities:

Specified Pools:

Despite the backup in rates, portfolio managers continue to seek prepay protection to avoid potentially low or negative yields.  Many investors have turned to specified pools (lower loan balances, NY/FL collateral, investor loans) to help partially mitigate faster prepay speeds. The graph below highlights monthly prepayment speeds on different collateral types.

Prepay Friction – 30-Year 2.5s of 2020

Mortgage Rates and Applications

Mortgage rates have taken a break after a significant climb during February. According to, last week the 30-year mortgage rate held firm at 3.23% while the 15-year mortgage rate declined 2 bps to 2.49%.  Rates remain historically low despite the fact the 30-year rate increased 40 bps during February.

Mortgage applications for the week ending March 5 fell 1.3%.  Refi applications dropped 5.0%.  The refi index is down 23% over the past six weeks and at its lowest since Oct. 16.

The primary/secondary mortgage spread (average 30-year mortgage rate minus 30-year MBS current coupon) declined 5 bps to 1.32%. The spread has narrowed 71 bps since hitting a high of 2.03% in early March 2020, but the pace of tightening has leveled out in recent weeks. The narrowing has been partially due to the mortgage industry adding headcount to lift capacity constraints. The 5-year average is 1.22%, which implies there’s still some room for a modest reduction to support mortgage rates.

Michael S. Erhardt, CPA

Senior Vice President, Investment Strategies

Vining Sparks IBG, LP

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