August 19, 2019
Yield spreads for current coupon MBS to Treasurys widened for the second consecutive week, with 30-year widening by 12 bps to 94 bps, while 15-year increased 5 bps to 61 bps.
Activity remained robust last week with solid two-way flow. The steady climb higher in MBS pricing has allowed investors to sell odd-lots and underperforming positions at prices much improved compared to just a few months ago. The 5-year Treasury yield has declined 96 bps since early April, with almost half of that move coming in the month of May.
We’ve also seen investors selling seasoned TBA deliverable FNMA/FHLMC 10- and 15-year into the TBA bid. The TBA bid for seasoned pools can result in a negative take-out yield (projected yield to the buyer) to the Treasury curve. The trade works best for coupons ranging from 2.50% to 4.00% with a current weighted-average maturity of 80 months or less. Reinvestment has generally been focused on specified pools (smaller loan balances) and/or higher duration product with locked-out cash flow.
The sting of the most recent prepayment report was evident in buying activity last week, as investors targeted lower coupon 15- and 20-year pools generally trading ~$102 or lower. There was also buying in 15-year pools collateralized by jumbo loans. The following is a list of actively traded sectors and coupons:
- 15-Year 2.0s to 3.5s – This was the most actively-traded sector last week with most of the focus on semi-seasoned lower coupons. 2.0s are quickly approaching par and offer relatively attractive spreads with rates unchanged or declining rate environments. The higher coupons tend to offer higher nominal spreads and superior OAS performance.
- 20-Year 2.5s & 3.0s – Investors seeking higher yields targeted newer-production 20-year pools.
- Off-The-Run-Collateral – Buyers seeking higher yields were also focused on 15-year pools collateralized by non-conforming jumbo loans with 3.0% & 3.5% coupons.
- CMBS – The focus for CMBS (Fannie DUS & Freddie Ks) was on finals in the 8- to 13-year range with lower premiums. This product along with lower-coupon MBS has been a prevalent trade for investors seeking locked-out cash flow, positive convexity, and higher yields.
Mortgage Rates and Refinance Activity
Benchmark mortgage rates were mixed last week. 15-year mortgage rates increased 1 bp to 3.19%, while 30-year mortgage rates declined 13 bps to 3.70%.
Mortgage applications rose 21.3% from the previous week, as mortgage rates declined to the lowest level since November 2016. The unadjusted purchase index grew 1.0% from a week ago but remained 19.0% higher than the same time period in 2018. The strength in the overall report reflected a large increase in the refinance index, which moved forward 37% from the previous week to its highest level since July 2016. As of now, the refinance index sits 196% higher than the same time period in 2018. The refinance share of mortgage activity increased to 61.4% from last week’s 53.9%.
Michael S. Erhardt, CPA
Senior Vice President, Investment Strategies
Vining Sparks IBG, LP