FRM Update

April 1, 2019

Yield spreads on current production MBS to Treasuries were mixed last week, with 15-year tightening 2 bps to 43 bps, while 30-year widened 5 bps to 70 bps.  Since year-end, yield spreads have tightened incrementally by 7 to 10 bps, which is relatively modest given the moves experienced in other fixed income sectors.

The change in pricing has spurred solid two-way flow across the MBS desk, with investors selling lower-performing securities and adding new positions. Investors have been drawn to both floating-rate product and duration within the sector.

The bond market rally and significant reduction in rates has sent the mortgage refinance index higher in recent weeks after drifting lower for most of 2018.  For the week ending 3/22, the refinance index climbed to 1,290, which is up 559 points from year-end. This trend has impacted investor demand to a degree, as we’ve seen MBS investors seemingly more focused of late on lower premiums and less prepayment risk.

The following represents an overview of the activity last week:


15-Year MBS


20-Year MBS


30-Year MBS



Mortgage Rates and Refinance Activity

Benchmark mortgage rates continued to decline last week. 15-year mortgage rates decreased 5 bps to 3.42%, while 30-year mortgage rates declined 9 bps to 4.08%, marking the lowest level in over a year.  The 30-year mortgage rate has declined 74 bps from its high in early November 2018.


Mortgage Applications Improve as Rates Continue Recent Decline: Mortgage applications rose 8.6% last week, the third strongest weekly gain of the year and the fourth biggest week since the middle of 2016. Lower rates are expected to aid stabilization in the housing sector but most series have yet to reflect a discernible positive effect. However, the general trend for mortgage applications has improved in recent weeks as the MBA’s mortgage rate estimates have declined.


Housing News:

Pending Home Sales Pulled Back Following Impressive January Jump: Pending home sales slipped more than expected in February after surging in January by the most in more than eight years . Pending sales, counted when contracts are signed and a leading indicator of existing sales in the months ahead, fell 1.0% last month. January’s impressive jump was revised slightly lower from 4.6% to 4.3%. Averaging through the monthly volatility, pending sales are up 3.2% from December but down 5.0% from a year ago. Regionally, the results were mixed as an unusually weak month for activity in the Midwest offset smaller gains in the South and West. Contract signings tumbled 7.2% in the Midwest, the largest drop (by 2.9%-points) since June 2010, while signings rose 1.7% in the South and 0.5% in the West. Recent housing data have been mixed, but purchase applications appear to have perked up recently, potentially the positive effects of lower mortgage rates. Despite an impressive 11.8% spike in February’s existing sales report last week, the second largest on record, the negative month for pending sales portends a more consistent recovery in home sales may still be some months off.

Michael S. Erhardt, CPA

Senior Vice President, Investment Strategies

Vining Sparks IBG, LP

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