August 21, 2017
Trading activity across the MBS and CMO sectors improved last week as the mortgage market, similar to the overall bond market, continues to trade in a tight range with minimal changes in yield spreads even as the Fed discusses the potential unwinding of QE. Mortgage yield spreads and mortgage rates were essentially unchanged last week. Mortgage applications moved slightly higher last week, while housing data continues to remain choppy with housing starts and building permits much weaker than expected in July. However, the NAHB’s home builder index improved unexpectedly in August on stronger current and expected sales metrics.
- Mortgage yield spreads were mixed last week:
- 15-year MBS yield spreads ended the week unchanged to 1 bps wider to Treasuries and swaps
- 30-year MBS yield spreads ended the week unchanged to 1 bps tighter to Treasuries and swaps
- Curve slope measured by 2- and 10-year Treasuries flattened 3bps last week from 91 to 88bps.
- Investors were active last week in moderately seasoned 15yr MBS, primarily in 3.5% coupons
- Investors were also active in seasoned 20yr MBS, primarily in 2.5% to 3.5% coupons and in seasoned 30yr MBS with 3.5% and 4% coupons.
- A combination of higher yield versus agency bullets and deference to convexity inspired activity in multi-family FNMA DUS with 7yr maturities, and in uncapped floating rate ACE bonds, taking advantage of higher yield opportunities in LIBOR rates.
Trading activity in CMOs improved last week on stronger flows from secondary markets combined with wider yield spreads in certain CMO structures last week. Depositories continue to focus on stable structures with 4- to 6-year average lives.
- Full coupon front sequential structures off of 30yr 3.5% collateral (“3.5 squared”) remained popular with financial institutions with wider spreads and better supply than many shorter structures.
- Investors were also active in VADM’s, which offer extension protection from structure and shorter stated final maturities. VADM yield spreads widened 4- to 5bps last week driving interest, while yield spreads in other CMO structures were unchanged.
Rates and Refis
- Mortgage rates were essentially unchanged last week:
- 15-year mortgage rates rose 1bp to 2.97%
- 30-year mortgage rates fell 1bp to 3.75%
- 15- and 30-year fixed mortgage rates have now fallen 27 and 31bps year-to-date; however; mortgage rates are 29 and 35bps higher than this time last year.
- Mortgage applications for the week ending August 11 rose 0.1% as purchase apps fell 1.5% and refi apps rose 1.6%. Purchase applications have weakened over the past month with the 4-week moving average dropping 6.3% since peaking in the June 23 report. However, the same 4-week moving average is up 3.0% for the year reflecting slow-but-growing housing sales. Refinance activity remains at historically low levels and the Refi Index reveals that burnout dominates an unincentivized population of mortgage holders this year.
Housing Starts and Building Permits Disappoint: New construction activity continued its choppy run with an unexpected 4.8% drop in new home starts. Adding to the disappointment, June’s starts data were revised lower as well. Continuing the recent trend, multi-family activity was the primary driver of the weakness, falling 15.3% MoM and 33.7% YoY. Building permits, the precursor to the starts data, also fell more than expected, down 4.1% MoM. Multi-family permits dropped 11.2% MoM while single family permits were unchanged for the month.
Dan Stimpson, CPA
Senior Vice President