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.
- 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.
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.
- 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