FRM Update

August 23, 2021

Current Yield Spreads

Minutes from the Fed’s July meeting were released last week and suggest the tapering of bond purchases could begin later this year.  The minutes showed “most” officials expect to begin tapering this year, “most” favored tapering Treasurys and MBS “proportionally” so net purchases end at the same time, “many” wanted the process complete before conditions may warrant a rate increase, and consensus support for divorcing tapering process from eventual consideration of rate hikes.  There was evidence of division on the more exact timing amid heightened uncertainty, with the minutes reflecting true debate more so than final decision-making.

All eyes will be on Chair Powell’s speech this week at the Jackson Hole symposium where investors will look for clarity about the timeline for a reduction in the Fed’s bond purchases. MBS valuations are historically tight and have been influenced by the significant amount of support from the Fed. The Fed has purchased a monthly average of $116.3 billion in agency MBS so far this year through the end of July. That accounts for 44% of UMBS 30-year and 45% of UMBS 15-year gross issuance on a percentage basis, according to data from the New York Fed.

The taper talk may already be impacting valuations as yield spreads have widened slightly over the past week, in four of the last five trading sessions.  However, that could reflect low trading activity as trading desks haven’t been fully staffed due to summer vacations. For the week, nominal yield spreads on 15-year MBS (1.5s) to Treasurys with similar duration widened by 3 bps to 41 bps, while yield spreads on 30-year MBS (2.0s) widened 6 bps to 74 bps. Depositories would likely welcome any further spread widening as most institutions have significant cash that needs to be deployed into higher yielding earning assets.

Trading Activity

The summary below reflects customer purchase activity from the previous week.  Activity was led by UMBS 20-year 2.0s and UMBS 15-year 1.5s.  There was also robust activity in 15- and 30-year Jumbo loan pools.

TBA-Eligible Securities:

Non-Deliverable Securities:

Specified Pools:

Mortgage Rates and Applications

U.S. mortgage rates drifted lower last week according to  15-year mortgage rates declined 2 bps to 2.31% while 30-year mortgage rates decreased 4 bps to 3.01%. Mortgage applications for the week ending August 13 fell 3.9% as purchase applications fell another 0.8% and refi applications dropped 5.3%.  The average 30-year mortgage rate rose 2 bps to 3.05% during the survey period.  Purchase applications continue to point to a disappointing pace of home sales.

Michael S. Erhardt, CPA

Senior Vice President, Investment Strategies

Vining Sparks IBG, LP

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