April 15, 2019
Yield spreads on current production MBS to Treasuries were mixed last week, with 15-year tightening 3 bps to 42 bps, while 30-year widened 5 bps to 71 bps. The story in the MBS sector remains one of relative value as yield spreads on municipals, callable agencies, and corporates have tightened significantly more than MBS this year.
The following represents an overview of the activity last week:
- Activity was robust in the 15-year sector last week with almost every coupon being traded (2.5’s – 4.0’s). The lower coupons (2.5’s and 3.0’s) were largely seasoned positions targeted by investors seeking less variability in cash flows.
- Most of the activity was in seasoned 2.5’s (160 WAM) trading at a discount. We did see some limited buying in higher coupons (3.5’s to 4.5’s) as well.
- We continue to see heavy demand for GN II 4.5’s and 5.0’s. Although this is new production 30-year paper, the projected price volatility is relatively low (ranging from -12.0% to -15.0% with rates up 300 bps), primarily because of the higher coupons and prepayment patterns typically associated with FHA/VA borrowers.
Most of the demand in recent weeks has been for floating-rate structures (Freddie K’s and FN ACES in which the fixed-rate cash flow has been swapped out for floating-rate cash flow). Fixed-rate buyers have focused on FN DUS with 7- to 10-year finals trading near par.
Mortgage Rates and Refinance Activity
Benchmark mortgage rates ticked up slightly last week. 15-year mortgage rates increased 1 bp to 3.50%, while 30-year mortgage rates rose 2 bps to 4.09%.
Mortgage applications for the week ending April 5 fell 5.6% on an 11.4% drop in refinance apps but a 0.5% gain in purchase apps. The recent drop in rates has helped push the 4-week moving averages up with purchase apps now at their highest level since 2009 and refi apps at their highest since mid-2017. Challenged by declining affordability, housing is likely to remain rate sensitive throughout 2019.
Michael S. Erhardt, CPA
Senior Vice President, Investment Strategies
Vining Sparks IBG, LP