August 26, 2019
Yield spreads for current coupon MBS to Treasurys continued their widening trend, with 30-year widening by 4 bps to 98 bps, while 15-year increased 5 bps to 66 bps. Yield spreads are near multi-year highs, as investors have sought greater levels of compensation due to premium pricing. 15-year 2.0s appear to be in the only coupon trading at par or below.
Portfolio managers were active last week as the market changes and volatility provided investors with various prospects, including selling underperforming positions and repositioning into higher duration product with better convexity profiles. Today presents another opportunity as MBS holders will receive P&I payments that will be relatively heavy versus previous months, due to aggressive paydowns.
We continue to see 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 with call protection stories (smaller loan balances, seasoned pools) and/or higher duration product with locked-out cash flow.
The following is a list of actively traded sectors and coupons:
- 15-Year 2.0s to 3.0s – Most of the trades were in new issue FN 3.0s.
- 20-Year 2.5s & 3.0s – Investors seeking slightly higher yields and duration targeted new production 20-year pools.
- Off-The-Run-Collateral – Buyers seeking higher yields were also focused on 30-year pools collateralized by non-conforming jumbo loans with 3.5% coupons.
- CMBS – The focus for CMBS (Fannie DUS & Freddie Ks) was on finals in the 8- to 12-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 inched up slightly last week. 15-year mortgage rates increased 2 bp to 3.12%, while 30-year mortgage rates increased 5 bps to 3.75%.
Mortgage applications for the week ending August 16 fell 0.9% after jumping 21.7% in the previous week. Interestingly, the recent strength in mortgage applications has come partly from increases in adjustable rate loans. According to the MBA data, adjustable rate loans jumped 6.4% during the reference week and 55.8% in the previous week. Mortgage rates continue to inch lower with the 30-year rate now down to 3.75%, the lowest since 2016. The bottom was seen back in 2012 when the 30-year rate fell briefly to 3.50%.
Michael S. Erhardt, CPA
Senior Vice President, Investment Strategies
Vining Sparks IBG, LP