April 16, 2018
MBS yield spreads versus Treasuries tightened, as Treasury yields rose across the curve. 15-year mortgage rates rose 4bps last week, continuing the trend higher this year, while 30-year mortgage rates were unchanged. Mortgage applications fell as both purchase and refinance applications declined for the second consecutive week. Refinance activity continues to be historically low and range-bound, driven lower by increasing mortgage rates in 2018.
- Mortgage yield spreads tightened last week.
- 15-year MBS yield spreads ended the week 1bp to 3bps tighter to Treasuries and swaps.
- 30-year MBS yield spreads ended the week 3 to 4bps tighter to Treasuries and swaps.
- Curve slope measured by 2- and 10-year Treasuries flattened from 51 to 46bps hitting a new cycle low last week.
- Investor activity in both seasoned and new specified pools peaked last week prior to the allocation roll-out of settlement dates. Strong demand for 2.5% and 3.5% offerings was exceeded by stronger demand for the 3% coupon.
- Seasoned 20yr MBS remained popular, primarily the 3.5% and 4.0% coupons. This is due to wider yield spreads and only slightly longer cash flows versus 15yr pools.
- Ongoing multifamily activity reflects aversion to negative convexity by many portfolio managers, as is also the current advantages of pricing off of the 5.5 to 7.5 year part of the curve.
- CMO yield spreads versus the Treasury curve tightened last week, though they remain relatively wide as compared to similar-duration MBS based on recent history.
- Front sequential backed by 30yr collateral remained the primary focus of financial institution buyers. The availability of collateral coupon variety, with 3.0%, 3.5%, and 4.0% options all available, presented a greater variety of cash flow profiles for front sequential tranches than is often available at one time.
- Comparisons of yields and spreads available on sequential CMO offerings to similar cash flows on collateral resulted in some crossovers to the cheaper CMOs.
Mortgage Rates and Refinance Activity
- Mortgage rates were mixed last week.
- 15-year mortgage rates rose 4bps to 3.72%, 50bps above the 12-month average of 3.22%.
- 30-year mortgage rates were unchanged at 4.29%, 35bps above the 12-month average of 3.94%.
- 15-year mortgage rates have increased 52bps in 2018, while 30-year mortgage rates are up 44bps YTD.
- Mortgage applications for the week ending April 6 fell 1.9% after falling 3.3% the prior week. Applications fell on a 1.7% drop in refi apps and a 2.0% decline in purchase apps.
- The MBA Refi Index fell 1.7% to 1111, below its 12-month average of 1322. Refinance activity continues to be historically low and range-bound averaging a low index level of 1208 since the beginning of the year and has been pushed lower by increasing mortgage rates in 2018.
Director of Investment Product Strategies
Dan Stimpson, CPA
Senior Vice President