FRM Update

April 9, 2018

MBS yield spreads versus Treasuries were mixed and CMO spreads widened as Treasury yields rose across the curve.  Mortgage related securities with average lives seven years and beyond finished the week with yield spreads 2bp to 3bp wider, while shorter structures tightened a couple of basis points.  30-year mortgage rates rose 2bps last week, continuing the trend higher this year, while mortgage applications fell as both purchase and refinance applications declined.  March prepayment speeds increased across most of the MBS market due primarily to technical factors with a 15% increase in FNMA speeds and a 13% increase in FHLMC speeds.  Seasonal factors favor slight increases in April prepayment speeds.  For additional prepayment commentary and charts, please see our March MBS Prepayment Commentary.

MBS

• Mortgage yield spreads were mixed last week.
  • 15-year MBS yield spreads ended the week 1 to 2bps tighter to Treasuries and swaps.
  • 30-year MBS yield spreads ended the week 1 to 3bps tighter to Treasuries and swaps.
  • Mortgage related securities with average lives of around seven years finished the week with yield spreads 2bp to 3bp wider.
• Curve slope measured by 2- and 10-year Treasuries steepened from 47 to 50bps. The Treasury curve hits its flattest levels of the cycle between 2/5s, 2/10s, and 2/30s the prior week.

• Investors were active in seasoned 15yr MBS in coupons ranging from 2.5% to 3% and in newer production 3.5% and 4.0% coupons.
• Investors were also active in seasoned 20yr MBS, primarily in 3.0% to 4.0% coupons, which offer attractive yields and spreads in the sector.
• A combination of higher yield versus agency bullets and deference to convexity inspired activity in seasoned multi-family Freddie K’s with 5 years to maturity.

CMOs

CMO yield spreads versus the Treasury curve widened last week, particularly on longer structures, widening more than fixed-rate MBS.  With recent market movements, CMO yields of 3% or higher became attainable for typical bank-type structures.  Significant investor activity is focused on those structures that offer 3% yields or higher with weighted average lives typically ranging from two to five years (base case) and up to seven years (+300bps).  Investor activity has primarily been focused in front sequential structures with coupons typically ranging from 4% to 4.5%, which currently offer a yield pickup of approximately 15 to 20bps compared to similar-duration fixed-rate MBS.

Mortgage Rates and Refinance Activity

• Mortgage rates were mixed last week.
  • 15-year mortgage rates fell 1bp to 3.68%, 47bps above the 12-month average of 3.21%.
  • 30-year mortgage rates rose 2bps to 4.29%, 36bps above the 12-month average of 3.93%.
  • 15-year mortgage rates have risen 48bps in 2018, while 30-year mortgage rates are up 44bps YTD.
• Mortgage applications for the week ending March 30 fell 3.3% after rising 4.8% the prior week. Applications fell on a 4.9% drop in refi apps and a 2.1% decline in purchase apps.
• The MBA Refi Index fell 4.9% to 1130, below its 12-month average of 1325. Refinance activity continues to be historically low and range-bound averaging a low index level of 1215 since the beginning of the year and has been pushed lower by increasing mortgage rates in 2018.

March MBS Prepayment Speeds

March prepayment speeds increased across most of the MBS market.  Technical factors drove most of the increase, as day count alone drove about a 10% fractional increase.  This and seasonal influences fall a little short of explaining the approximately 15% fractional increase in FNMA speeds or 13% in FHLMC speeds.  A similarly sized overall increase for GNMA showed less consistency with almost all cohorts accelerating but by variable amounts.  Springtime often motivates elevated housing activity, so upward bias from seasonal factors favors slight increases in April prepayment speeds even as mortgage rates continued to hold within a mostly consistent range for the meaningful time frame.  For additional prepayment commentary and charts, please see our March MBS Prepayment Commentary.

Dan Stimpson, CPA

Senior Vice President

Vining Sparks