April 6, 2020
Since March 16, the Fed has purchased $319bn of agency mortgage-backed securities as part of its continued effort to stabilize the sector and ultimately drive mortgage rates lower. Nearly $111bn of that total buying consists of UMBS 30-year 2.5s, 3.0s, and 3.5s for April settle. The scale of purchases has reduced volatility, sent pricing drastically higher, and narrowed spreads. For context, the price of FNMA 30-year 3.0s was approximately $100-20 on March 20, and today these securities are bid near $105, and traded as high as $106 last week.
Nominal spreads on current-coupon MBS compared to Treasurys were modestly wider on a week-over-week basis, as 15-year increased 10 bps to 82 bps, and spreads on 30-year widened 16 bps to 104 bps. Interestingly, higher coupons were tighter even in the face of lower mortgage rates, largely because the Fed’s purchases included 30-year 4.0s and 4.5s.
The March prepayment speed report will be released tomorrow with most projections seeing near a 20% increase over the previous month. The following months are expected to see a reduction in prepayment speeds due to social distancing.
Financial institutions have enjoyed the improvement in pricing (via the Fed) and selectively sold TBA-deliverable securities into the market rally. Proceeds and new additions have been used to take advantage of wider spreads available in non-deliverable MBS and other sectors (CMOs, Municipals, Corporates). Spreads remain wider for non-deliverable securities that the Fed is not buying, such as GNMA 15-year pools, and both GNMA and conventional pools collateralized by jumbo loans.
Mortgage Rates and Refinance Activity
Mortgage rates declined for the second consecutive week, with 15-year declining 8 bps to 3.20% and 30-year decreasing 1 bp to 3.79%. Mortgage rates remain high relative to swaps and Treasury yields as lenders have been reluctant to reduce rates because of overwhelming refinancing demand. Mortgage rates are essentially unchanged from December 31, 2019, while the yield on a 10-year Treasury has declined 132 basis points. Mortgage applications for the week ending March 27 rebounded 15.3% from the previous week’s decline. However, the details of the report show all the increase in activity stemmed from a 25.5% increase in refis while purchase apps dropped 10.8% to their lowest level since 2016.
Michael S. Erhardt, CPA
Senior Vice President, Investment Strategies
Vining Sparks IBG, LP