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  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

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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