August 14, 2017
Mortgage yield spreads widened a couple of basis points last week as Treasuries rallied on increased geopolitical concerns. Mortgage rates moved lower again last week, while mortgage application activity increased for purchase and refinance applications. Fed’s Evans said a September announcement of balance sheet normalization is reasonable, but recent inflation weakness raises questions about the overall outlook.
- Mortgage yield spreads widened a couple of basis points last week:
- 15-year and 30-year MBS yield spreads ended the week 1 to 2bps wider to Treasuries and swaps
- Curve slope measured by 2- and 10-year Treasuries was unchanged last week at 91bps
- Investors were active in seasoned 20yr MBS, primarily in 3% to 3.5% coupons that mimic 15-year MBS.
- Investors were also active in uncapped floating rate Freddie K’s, taking advantage of higher yield opportunities in LIBOR rates.
Trading activity in CMOs was on the slower side and yield spreads in CMOs were generally unchanged to slightly wider last week. Depositories continue to focus on stable structures with 4- to 6-year average lives.
- Full coupon front sequential structures off of 30yr 3.0% and 30yr 3.5% collateral (“3.5 squared”) remained popular with financial institutions with wider spreads and better supply than many shorter structures.
Rates and Refis
- Mortgage rates fell last week.
- 15-year mortgage rates fell 3bps to 2.96%
- 30-year mortgage rates fell 5bps to 3.76%
- 15- and 30-year fixed mortgage rates have now fallen 28 and 30bps year-to-date; however; mortgage rates are 32 and 41bps higher than this time last year.
- Mortgage applications for the week ending August 4 rose 3.0% as purchase apps rose 0.8% and refi apps increased 5.3% to 1433 in the MBA Refi Index. Looking through the weekly noise, purchase activity has weakened recently with the four-week average having now declined in each of the last six weeks. Refinance activity remains at historically low levels and the Refi Index reveals that burnout dominates an unincentivized population of mortgage holders this year.
Fed Doves Concerned about Weak Inflation, Still Favor September Balance Sheet Normalization Plan: Chicago Fed Bank President Evans warned on the low rate of inflation recently saying that undershooting 2% inflation could cost more than overshooting the target. While he still believes it is reasonable to expect inflation to reach 2% over the next few years, the recent below-target readings have been meaningful enough that he is questioning the outlook. He reiterated that the FOMC should be “very careful” going forward.
St. Louis Fed Bank President Bullard raised the bar in a Bloomberg interview saying the FOMC does not need to be pre-emptive with rate hikes amidst weak inflation, adding that he’s not very optimistic on inflation gains this year. However, both regional bank presidents affirmed their support of beginning balance sheet adjustments in September.
Dan Stimpson, CPA
Senior Vice President