FRM Update

April 2, 2018

MBS yield spreads versus Treasuries widened as Treasury yields fell across the curve beyond two years.  The Treasury curve hits its flattest levels of the cycle between 2/5s, 2/10s, and 2/30s. Mortgage rates fell 6bps last week reversing the trend higher this year, while mortgage applications rose as both purchase and refinance applications increased.  The S&P CoreLogic 20‐City Composite Home Price Index increased unexpectedly at the fastest pace since July 2014 (6.40% YoY) and pending home sales rose a stronger-than-expected 3.1% MoM in February.

MBS

• Mortgage yield spreads widened last week.
  • 15-year MBS yield spreads ended the week unchanged to 1bps wider to Treasuries and swaps.
  • 30-year MBS yield spreads ended the week 1 to 2bps wider to Treasuries and swaps.
• Curve slope measured by 2- and 10-year Treasuries flattened from 56 to 47bps. The Treasury curve hits its flattest levels of the cycle between 2/5s, 2/10s, and 2/30s.  The spread between the 2-year and 5-year yield fell to 29 bps. This pushed Z-spreads wider by greater amounts than the more frequently cited (and less relative value indicative) I-spreads.

• Investors were active in seasoned 15yr MBS in coupons ranging from 2.5% to 3% and in newer production 3.5% and 4.0% coupons.
• Investors were also active in newer production 20yr MBS, primarily in 3.5% coupons, which offer attractive yields and spreads in the sector.
• A combination of higher yield versus agency bullets and deference to convexity inspired activity in seasoned multi-family Freddie K’s with 5 years to maturity.

CMOs

CMO yield spreads versus the Treasury curve were unchanged on shorter structures and widened on longer structures.  With the recent market movements, CMO yields of 3% or higher became attainable for typical bank-type structures.  Significant investor activity is focused on those structures that offer 3% yields or higher with weighted average lives typically ranging from two to five years (base case) and up to seven years (+300bps).  Investor activity has primarily been focused in front sequential and VADM structures with coupons typically ranging from 4% to 4.5%, with the majority of the activity recently focused on higher coupon front sequential structures.

Mortgage Rates and Refinance Activity

• Mortgage rates fell last week.
  • 15-year mortgage rates fell 6bps to 3.69%, 49bps above the 12-month average of 3.20%.
  • 30-year mortgage rates fell 6bps to 4.27%, 35bps above the 12-month average of 3.92%.
  • 15-year mortgage rates have risen 49bps in 2018, while 30-year mortgage rates are up 42bps YTD.
• Mortgage applications for the week ending March 23 rose 4.8% on a 7.3% jump in refi apps and a 3.1% increase in purchase apps.  On a 4-week trailing average basis, removing some of the week-over-week noise, refi apps remain very low while purchase apps have rebounded a bit over the past few weeks.  All told, purchase apps remain fractionally encouraging, pointing to approximately 5% YoY growth in new and existing home sales.

• The MBA Refi Index rose 7.3% to 1189, below its 12-month average of 1328. Refinance activity continues to be historically low and range-bound averaging a low index level of 1222 since the beginning of the year and has been pushed lower by increasing mortgage rates in 2018.

Housing

• Home Price Appreciation Slows Nationally; Remains Strong in Metro Areas: The S&P CoreLogic 20‐City Composite Home Price Index increased unexpectedly at the fastest pace since July 2014 (6.40% YoY); however, the national pace of appreciation slowed for the first time in 20 months (6.18% YoY).
• Pending Homes Sales Bounced Higher in February; Outlook for Existing Sales Remains Subdued: Pending home sales rose a stronger-than-expected 3.1% MoM in February.  All four regions advanced from January’s pace but it was a 10.3% gain in the Northeast and 3.0% improvement in the South that moved the needle. On a YoY basis, the results were less optimistic. Activity has now declined for several consecutive months and the seasonally adjusted index continues to reflect a weakening trend.

Dan Stimpson, CPA

Senior Vice President

Vining Sparks