April 30, 2018
MBS and CMO yield spreads versus Treasuries were stable last week. On a relative basis activity in mortgage related securities, including CMOs, probably fared best compared to other sectors versus recent weeks, although activity would be better described as improved than impressive. Mortgage rates rose again last week, rising each week during the month of April to the highest levels in over four years. Mortgage applications fell 0.2% as refinance activity slowed 0.3% and purchase applications were flat after a healthy bounce the week before. Sales of new and existing home sales topped expectations in March, as inventory remains tight and prices continue rising, despite higher mortgage rates.
- Mortgage yield spreads were stable last week.
- 15-year and 30-year MBS yield spreads ended the week generally unchanged to +/-1bp to Treasuries and swaps.
- Curve slope measured by 2- and 10-year Treasuries flattened from 49 to 47bps, not far off the cycle low of 43bps on April 17th.
- Investor activity in both seasoned and new 15yr MBS improved last week with most demand in coupons ranging from 2.5% to 3.5%.
- Seasoned 20yr MBS remained popular, primarily the 3.5% and 4.0% coupons. This is due to wider yield spreads and only slightly longer cash flows versus 15yr pools.
- Ongoing multifamily activity in FNMA DUS and Freddie K’s reflects aversion to negative convexity by many portfolio managers, as also the current advantages of pricing off of the 5.5- to 7.5-year part of the curve.
- CMO yield spreads versus the Treasury curve were generally unchanged last week, though they remain relatively wide as compared to similar-duration MBS based on recent history.
- Front sequentials backed by 30yr collateral remained the primary focus of financial institution buyers. The availability of collateral coupon variety, with 3.0% to 4.5% options all available, presented a greater variety of cash flow profiles for front sequential tranches than is often available at one time.
- Comparisons of yields and spreads available on sequential CMO offerings to similar cash flows on collateral resulted in some crossovers to the cheaper CMOs. Most of the investor activity continues to be focused in front sequential structures with coupons ranging from 4% to 4.5%.
Mortgage Rates and Refinance Activity
- Mortgage rates rose again last week, rising each week during the month of April to the highest levels in over four years.
- 15-year mortgage rates rose 4bps to 3.85%, 60bps above the 12-month average of 3.25%.
- 30-year mortgage rates rose 2bps to 4.43%, 47bps above the 12-month average of 3.96%.
- 15-year mortgage rates have increased 65bps in 2018, while 30-year mortgage rates are up 58bps YTD.
- Mortgage Bankers Association reported the average 30-year fixed rate rose from 4.66% to 4.73%, the highest since September 2013.
- Mortgage applications fell 0.2% for the week ended April 20 as refinance activity slowed 0.3% and purchase applications were flat after a healthy bounce the week before. The prior week’s report showed a 4.9% gain in overall activity driven by a 6.1% improvement in purchase activity and a smaller 3.5% gain for refi apps.
- The MBA Refi Index fell 0.3% to 1146, below its 12-month average of 1316. Refinance activity continues to be historically low and range-bound, averaging a low index level of 1201 since the beginning of the year and has been pushed lower by increasing mortgage rates in 2018.
- Existing home sales rose 1.1% in March as gains in the Northeast and Midwest offset slower activity in the South and West. Limited inventory remains a headwind as the 1.67MM existing homes listed for sale represented the fewest for March in records back to 1999.
- New home sales rose 4.0% MoM (+1.9% expected) in March to a 694k annualized pace, the second strongest since 2007. 1Q18 is firmer than expected, but still a moderation from 4Q17.
- Separate measures tracking home price trends showed a continuation of steady price appreciation in February. FHFA’s index eased to a 7.2% YoY pace, the second fastest since 2013. S&P CoreLogic Case‐Shiller’s national index rose 6.3% YoY, the fastest since 2014.
Dan Stimpson, CPA
Senior Vice President