FRM Update

April 5, 2021



Fed Support   

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.


Trading Activity

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.

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

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

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