April 10, 2017
Trading activity across the MBS and CMO sectors improved last week, but remained light as the mortgage market continues to trade in a tight range with minimal changes in yield spreads even as the Fed discusses the potential unwinding of QE. Yield spreads in 15yr and 30yr fixed MBS were mixed last week: slightly tighter to Treasuries and slightly wider to swaps. 30yr mortgage rates fell another 4bps last week and have declined 22bps this year. Mortgage applications declined for the third consecutive week falling 1.6% as refinance applications fell 4.2%. Technical and seasonal factors caused prepayment speeds to increase in March, but speeds were slightly slower than expected. Day count this month should more than offset the seasonal increase in home sales, and April prepayment speeds are expected to slow down.
- Mortgage yield spreads were mixed last week:
- 15yr and 30yr MBS spreads ended the week unchanged to 1bp tighter to Treasuries and were 1bp to 2bps wider to swaps
- Investors focused on seasoned 20yr MBS as an alternative to 15yr MBS as well as seasoned 30y MBS as an alternative to 20yr MBS.
Trading activity in CMOs improved last week, but remains on the lighter side as the availability of specific structures continues to limit activity with issuance remaining quite weak. Bid list inquiries and swap activity improved in odd lot clean-ups. VADM structures with 4 to 6-year weighted average lives were among the focus positions for depositories.
Rates and Refis
- Mortgage rates declined last week
- 15yr mortgage rates fell 3bps to 3.36%
- 30yr mortgage rates fell 4bps to 4.10%
- 15-year and 30-year fixed mortgage rates have now fallen 19bps and 22bps year-to-date; however, mortgage rates are up 48bps and 53bps post-election, respectively.
- Mortgage applications fell for the third consecutive week for the week ending March 31. The MBA mortgage applications index fell 1.6% driven lower by a 4.2% decline in refi apps, but purchase apps continue on an upward path rising 0.7%. The 4-week moving averages show that purchase activity continues to rebound from the mid-2016 drop while refi activity remains very light.
March Prepayment Speeds
Slightly slower than expected prepayment speeds occurred last month. In nominal terms, much faster prepayments occurred in March than in February. However, technical and seasonal factors caused this increase. While March did post the first monthly overall prepayment speed increase in six months, the increase should not be viewed as a reversal of what should be a long-term trend toward gradually slowing prepayment speeds absent a decline in mortgage rates or significant changes at the mortgage GSEs. For additional prepayment commentary and charts, click here.
Dan Stimpson, CPA
Senior Vice President