April 22, 2019
Yield spreads on current production MBS to Treasuries widened last week, with 15-year increasing 5 bps to 47 bps, while 30-year widened 3 bps to 74 bps.
The MBA Refinance Index declined modestly once again last week; however the index remains elevated at 1453. To put this into context, we haven’t seen this much activity since the summer of 2017.
Buying activity last week was spread somewhat evenly across the various sectors outlined below. There was also solid two-way flow with customers disposing of odd-lots and underperforming positions.
The following represents an overview of the activity last week:
- Nearly every coupon (2.0’s – 4.0’s) was traded. Most of the activity was concentrated in the lower coupons (2.0’s – 3.0’s), and these were mostly seasoned positions targeted by investors seeking less variability in cash flows and lower premiums.
- Most of the activity was in new production higher coupons (3.5’s and 4.5’s) trading in the $102 to $105 range. Another popular trade has been in lower coupons (2.0’s and 2.5’s), often as part of a barbell strategy.
- Demand was largely focused on 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.
- We have seen continued demand 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.
Mortgage Rates and Refinance Activity
Benchmark mortgage rates ticked up slightly last week. 15-year mortgage rates increased 6 bps to 3.56%, while 30-year mortgage rates rose 3 bps to 4.12%.
After a solid four-week run that tracked mortgage rates, mortgage applications have now cooled in the first two weeks of April. Total mortgage applications fell 3.5% last week after a 5.6% drop in the week before. However, the slower pace of activity has been exclusively driven by refinancing interest which cooled 8.2% last week and 11.4% the week prior. As for new purchases, the weekly data’s implications were more positive and continued to point to stability in home sales activity. Purchase applications inched up 0.9% last week and have now risen in each of the last six weeks. The six-week run marks the longest consecutive stretch of improvement since at least 1990 and has pushed the index up 16.7% from where it started March.
Michael S. Erhardt, CPA
Senior Vice President, Investment Strategies
Vining Sparks IBG, LP