April 13, 2020
Since March 16 the Fed has purchased $446bn of agency mortgage-backed securities as part of its continued effort to stabilize the sector and improve financial conditions. The buying has focused on the UMBS 30-year 2.5%, 3.0%, and 3.5% coupons for April settle. Over that time frame, the Fed has purchased $41bn, $78bn, and $43bn of those coupons, respectively. The New York Fed plans to purchase roughly $15bn a day of agency mortgages this week, according to its website. That’s $10bn per day lower than last week’s $25bn target.
The unprecedented scale of Fed purchases has significantly reduced price and spread volatility in the sector. Prices have been pushed far higher and spreads have narrowed from stressed levels. For context, the price of FNMA 30-year 3.00s was approximately $100-20 on March 20, and today these securities are bid near $105-24. Nominal spreads on current-coupon MBS compared to Treasurys were tighter on a week-over-week basis, as 15-year decreased 11 bps to 71 bps, and spreads on 30-year tightened 17 bps to 87 bps. Over the past month, nominal spreads on 15- and 30-year MBS have declined 39 bps and 66 bps, respectively.
The March prepayment report was released last week and showed that speeds were considerably faster versus February. Our complete prepayment commentary, including some initial thoughts on forbearances, can be found here.
Activity last week was largely dominated by financial institutions taking advantage of the significant improvement in pricing (via the Fed) and selling TBA-deliverable securities. Proceeds and new investments have been focused on non-deliverable MBS and sectors with wider spreads (CMOs, Municipals, Corporates). Spreads remain wider for non-deliverable securities that the Fed is not buying, such as GNMA 15-year pools, and both GNMA and conventional pools collateralized by jumbo loans.
Mortgage Rates and Refinance Activity
Mortgage rates declined for the third consecutive week, with 15-year declining 3 bps to 3.17% and 30-year decreasing 10 bps to 3.69%. New mortgage applications to buy homes fell to their lowest weekly level since 2015 according to the MBA report for the week ending April 3. Applications fell 17.9% on a 12.2% drop in purchase apps and a 19.4% drop in refi apps. Mortgage applications and the associated activities are facing multiple challenges now: a loss of employment/income, buyers unable to look at new homes, and mortgage rates that have not fallen with Treasury yields. At the end of 2019, the 30-year mortgage rate stood at 3.78%, 191 bps over the 10-year Treasury yield. As of April 10, the 30-year mortgage rate is at 3.69%, 297 bps over the 10-year Treasury yield which has dropped to 0.72%.
Michael S. Erhardt, CPA
Senior Vice President, Investment Strategies
Vining Sparks IBG, LP