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.






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




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

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