April 5, 2021
The Federal Reserve’s aggregate mortgage buying totaled $23.4bn last week. The most heavily purchased securities were UMBS 30-year 2.0s and 2.5s with total volumes of $9.8bn and $6.7bn, respectively. The Fed purchased $132.4bn in agency MBS during March, the highest monthly total since April of 2020 at $295.1bn. Another positive tailwind for MBS continues to be provided by the banking sector. U.S. commercial banks have added just over $136bn in mortgages to their holdings this year through March 17, which comes to an annualized growth rate of 28%. Last year the banks added approximately $440bn in mortgages, a growth rate of 21.4% and the highest in at least a decade.
Current Yield Spreads
Last week nominal spreads on both 15- and 30-year MBS tightened 8 bps as light supply and another drop in the refinance index led to stronger demand. 15-year 1.5s have widened 25 bps this year despite the recent rally.
The summary below reflects purchase activity from the previous week. Activity was led by UMBS 20-year 1.5s and 2.0s followed by UMBS 15-year 1.5s.
- UMBS 10-year 1.5s to 2.5s
- UMBS 15-year 1.0s to 2.5s (1.5s the most traded)
- UMBS 20-year 1.5s to 3.0s (1.5s the most traded)
- UMBS 30-year 2.0s & 2.5s (2.0s the most traded)
- FNMA 30-year Jumbo 1.5s to 2.5s
- GNMA 30-year Jumbo 3.0s
- 15- and 30-year 1.5s to 3.0s LLB Pools ($85k -$225k 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
U.S. mortgage rates rose modestly last week according to Bankrate.com. The 30-year mortgage rate increased 5 bps to 3.27% while the 15-year mortgage rate increased 4 bps to 2.51%. The 30-year rate has increased 37 bps this year but remains relatively low. One year ago, the 30-year rate was 4.07%, or 80 bps higher.
Mortgage applications for the week ending March 26 fell 2.2% on a 2.5% drop in refi apps and a 1.5% decline in purchase apps. The refi index has dropped 32% since peaking in late January.
The primary/secondary mortgage spread (average 30-year mortgage rate minus 30-year MBS current coupon) increased 2 bps to 1.32%. The spread has narrowed 18 bps this year, while the 10-year Treasury yield has increased 81 bps. The current spread of 1.32% remains elevated compared to the 5-year average of 1.23%.
Michael S. Erhardt, CPA
Senior Vice President, Investment Strategies
Vining Sparks IBG, LP