FRM Update

April 12, 2021

Fed Support  

The Federal Reserve’s aggregate mortgage buying totaled $28.6bn last week.  Purchases were led by UMBS 30-year 2.0s and 2.5s with total volumes of $13.2bn and $6.6bn, respectively.  The amount of Fed support has been and continues to be historic.  Net supply of agency MBS in 2020 was $508bn, the highest level since 2007.  According to estimates, the Fed absorbed 108% of that net issuance amount through its QE program.

Minutes from the Fed’s March meeting were released last week and reinforced the pledge to keep policy accommodative.  The minutes read “participants significantly revised up their projections for real GDP growth this year,” largely due to the “encouraging developments regarding the pandemic.” However, uncertainty about the outlook remained elevated and “economic activity and employment were currently well below levels consistent with maximum employment.” Importantly, there was little discussion to detract from officials’ repeated pledges to keep policy accommodative until further notice.

Current Yield Spreads

It was another solid week for MBS as they outperformed Treasurys. Last week nominal spreads on 30-year MBS tightened 4 bps to 60 bps while 15-year spreads tightened 5 bps to 50 bps.  Investor demand for MBS is robust and continues to be buoyed by support from the Fed, the recent decline in the refinance index, and potential for slower prepayments.

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

U.S. mortgage rates dropped last week according to, reversing a steady trend higher during most of 2021.  The 30-year mortgage rate decreased 9 bps to 3.18% while the 15-year mortgage rate fell 8 bps to 2.43%.  30-year fixed rates are up 31 bps this year but are still down by 164 basis points since November 2018’s last peak of 4.82%.

Mortgage applications for the week ending April 2 fell 5.1%. Purchase apps fell 4.6% and refi apps dropped 5.3%. The refi index has dropped 35% since peaking in late January.

The March prepayment speed report was released last week.  Fannie Mae 30-year aggregate prepayment speeds increased 11% over the previous month to a CPR of 35.4.  The increase was driven mostly by the number of available business days in March to 23 from 19 the previous month.  Speeds should begin to decline beginning with the April report, as higher mortgage rates have slowed the pace of refinancing.  Please see here for our complete prepayment commentary.

The primary/secondary mortgage spread (average 30-year mortgage rate minus 30-year MBS current coupon) decreased 2 bps to 1.30%. The spread has narrowed 20 bps this year, while the 30-year mortgage rate has increased 31 bps. The current spread of 1.30% remains elevated compared to the 5-year average of 1.23%.

Michael S. Erhardt, CPA

Senior Vice President, Investment Strategies

Vining Sparks IBG, LP

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