August 13, 2018
Yield spreads on current production MBS widened slightly this past week, as the sector failed to keep pace with the overall Treasury market rally on Thursday and Friday. Both 15- and 30-year MBS yield spreads to Treasuries were wider by 2 to 3 bps.
The theme in the MBS sector continues to be investors seeking defensive style cash flow structures with an emphasis on shorter duration product. The majority of portfolio additions continue to be seasoned paper at low or discounted dollar prices.
The following represents a summary of the activity we observed last week:
- Seasoned 15-year 2.5s and 3.0s – The flat yield curve and relative value in these coupons has driven investors to this segment. There continues to be a relatively small pay up over TBA for pools with seasoning between 18 to 36 months. In some cases, investors can potentially receive less price volatility and greater stability of cash flows relative to new pools, for a modest trade-off in projected yield. Please see a recent Strategic Insight discussing the current merits of slightly seasoned, below par 15-year MBS.
- 15-Year 3.5s and 4.0s – New or recently issued pools.
- 20-Year 3.0s and 3.5s – Seasoned pools with WAMs ranging from 190-200 months, an alternative to new issue 15-year MBS with higher premiums.
- Non-TBA pools – Seasoned FNMA Relocation 15yr 2.0’s.
- 30-Year 4.0s – New production FNMA pools.
- FNMA DUS and Freddie K’s – The focus for FNMA DUS was on 7-year finals with 5.0% coupons. The trading in Freddie K’s has largely been on the 4- to 5-year part of the curve.
Mortgage Rates and Refinance Activity
- Benchmark mortgage rates declined for the week ending 8/10.
- 15-year mortgage rates declined 6bps to 3.80%, 32bps above the 12-month average of 3.48%, and 8bps above the YTD average of 3.72%.
- 30-year mortgage rates fell by 4bp to 4.41%, 29bps above the 12-month average of 4.12%, and 8bps above the YTD average.
- 15-year mortgage rates have increased 60bps in 2018, while 30-year mortgage rates are up 56bps YTD.
Mortgage Applications: Mortgage applications for the week ending August 3, 2018 declined 3.0% from the previous week, the fourth consecutive weekly decline. The refinance index led the overall drop in applications by falling 5.0% for the week. This marks the index reaching its lowest point since December 2000. The index has now declined 35.0% year over year. The purchase index fell 2.0% both on a seasonally adjusted and unadjusted basis since last week.
Michael S. Erhardt, CPA
Senior Vice President
Vining Sparks, IBG