April 26, 2021
The Federal Reserve’s aggregate mortgage buying totaled $31.2bn last week and is depicted in the table below. The most heavily purchased securities were UMBS 30-year 2.0s and 2.5s with total volumes of $11.5bn and $8.6bn, respectively. Aggregate mortgage bond purchases by the Fed during this round of quantitative easing passed the $1.9tn level last week and should reach $2.0tn next month.
Current Yield Spreads
Last week nominal spreads for MBS compared to Treasurys with similar duration were mixed. Spreads on 15-year MBS tightened 1 bp to 42 bps, while spreads for 30-year MBS widened 2 bps to 52 bps. Spreads have narrowed approximately 20 bps over the past month with continued strong Fed and bank demand.
The summary below reflects purchase activity from the previous week. Activity picked up in 10- and 15-year pools as investors targeted lower duration. However, 20-year 1.5s and 2.0s continue to lead overall activity.
- UMBS 10-year 1.5s and 2.0s
- UMBS 15-year 1.0s to 2.0s (2.0s the most traded)
- UMBS 20-year 1.5s to 2.5s (1.5s the most traded)
- UMBS 30-year 1.5s to 2.5s (2.5s the most traded)
- FNMA 30-year Jumbo 1.5s to 2.5s
- GNMA 15-year Jumbo 1.5s to 3.0s
- 15- and 30-year 1.5s to 3.0s LLB Pools ($85k -$250k max loan size) and NY collateral
- Custom CRA Pools
Despite the backup in rates, portfolio managers continue to seek prepay protection to avoid potentially low or negative yields. Many investors have turned to specified pools (lower loan balances, NY/FL collateral, investor loans) to help partially mitigate faster prepay speeds. The graph below highlights monthly prepayment speeds on different collateral types.
Prepay Friction – 30-Year 2.5s of 2020
Mortgage Rates and Applications
After having dropped two weeks in a row, U.S. mortgage rates were mixed last week according to Bankrate.com. The 30-year mortgage rate held firm at 3.07% while the 15-year mortgage rate fell 6 bps to 2.35%. The 30-year rate has decreased 20 bps over the past three weeks, which has reduced the year-to-date increase to 17 bps.
Mortgage applications rose 8.6% in the week ending April 16 as mortgage rates declined again. Purchase applications rose 5.7% for the week and are now down just 15% from the January peak. Refi apps jumped 10.4%, the first increase in activity in 11 weeks. Refis remain down 32% from January’s peak.
The primary/secondary mortgage spread (average 30-year mortgage rate minus 30-year MBS current coupon) decreased 1 bp to 1.29%. The spread has narrowed 21 bps this year and 38 bps from one year ago. The current spread of 1.29% remains slightly elevated compared to the 5-year average of 1.23%.
Michael S. Erhardt, CPA
Senior Vice President, Investment Strategies
Vining Sparks IBG, LP