April 11, 2022
Current Yield Spreads
The Treasury curve steepened sharply last week as the Fed signaled an aggressive balance sheet runoff will soon be underway. The minutes from the FOMC meeting held on March 15 and 16 noted that “all participants agreed that elevated inflation and tight labor market conditions warranted a faster pace of decline in securities holdings than over the 2017-19 period” and that the process could get underway as soon as the May meeting. “Participants generally agreed that monthly caps of about $60 billion for Treasury securities and about $35 billion for agency MBS would likely be appropriate. Participants also generally agreed that the caps could be phased in over a period of three months or modestly longer if market conditions warrant.” The size of the caps and the phase-in period are notably more aggressive than the normalization process that was announced in June 2017. In that episode, monthly caps of $10 billion ($6 billion Treasury securities, $4 billion MBS) were “gradually” stepped up “at three-month intervals over 12 months” to a final cap of $50 billion ($30 billion, $20 billion).
With less Fed support and concerns the Fed won’t be able to slow inflation soon enough, the yield on 2-year Treasurys increased 6 bps to 2.51%, while the yield on 10-year Treasuries rose 32 bps to 2.70% (highest in three years). The MBS sector was unable to keep pace with Treasuries as yield spreads widened. Nominal yield spreads on 15-year MBS current coupon production widened 4 bps to 31 bps, while yield spreads on 30-year MBS to Treasurys with similar duration widened 2 bps to 101 bps.
The summary below reflects customer purchase activity from the previous week. Activity shifted slightly from UMBS 20-year 2.5s and 3.0s to UMBS 15-year 2.5s and 3.0s (both new and semi-seasoned production). We also observed more activity in the 10-year sector as investors remain cautious and prefer shorter duration. There was steady demand for 15-year GN Jumbo 2.0s and 2.5s.
Mortgage Rates & Applications
Mortgage rates continued to climb higher last week as the 15-year increased 13 bps to 4.20% and the 30-year rate increased 15 bps to 5.06%, according to Bankrate.com’s weekly survey. The 30-year rate of 5.06%, the highest since March 2010, has risen in 14 of the last 15 weeks and is up 188 bps YoY from 3.18% and more than 221 bps since the low in February 2021.
Mortgage refinancings declined 9.9% from the week ended April 1, according to data from the Mortgage Bankers Association. It was the fourth consecutive weekly decline and refis are now down 62% YoY. With the average homeowner mortgage rate down to 3.37%, according to data aggregated by the Federal Reserve, the current level for rates is clearly a headwind.
Michael S. Erhardt, CPA
Senior Vice President, Investment Strategies