FRM Update

April 26, 2021

Fed Support  

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.

Trading Activity

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.

TBA-Eligible Securities:

Non-Deliverable Securities:

Specified 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  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

The information included herein has been obtained from sources deemed reliable, but it is not in any way guaranteed, and it, together with any opinions expressed, is subject to change at any time. Any and all details offered in this publication are preliminary and are therefore subject to change at any time. This has been prepared for general information purposes only and does not consider the specific investment objectives, financial situation and particular needs of any individual or institution. This information is, by its very nature, incomplete and specifically lacks information critical to making final investment decisions. Investors should seek financial advice as to the appropriateness of investing in any securities or investment strategies mentioned or recommended. The accuracy of the financial projections is dependent on the occurrence of future events which cannot be assured; therefore, the actual results achieved during the projection period may vary from the projections. The firm may have positions, long or short, in any or all securities mentioned. Member FINRA/SIPC.
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