August 28, 2017
Trading activity across the MBS and CMO sectors was on the slow side last week as the mortgage and overall bond markets continue to trade in a tight range with minimal changes in yield spreads. Mortgage rates fell 1 to 2bps last week and mortgage applications fell 0.5% on a 1.5% drop in purchase apps and a 0.3% increase in refi apps. New and existing home sales declined in July and were well short of economists’ expectations and capped off a disappointing week for housing.
- Mortgage yield spreads were unchanged to tighter last week:
- 15-year MBS yield spreads ended the week 3bp tighter to Treasuries and were unchanged to swaps
- 30-year MBS yield spreads ended the week unchanged to Treasuries and swaps
- Curve slope measured by 2- and 10-year Treasuries flattened 4bps last week from 88 to 84bps.
- Investors were active in new and seasoned 20yr MBS, primarily in 2.5% to 3.5% coupons and in seasoned 30yr MBS with 3.5% and 4% coupons.
- Investors were also active last week in moderately seasoned 15yr MBS, primarily in 3.5% coupons.
Trading activity in CMOs was generally slow last week with slightly 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.
Rates and Refis
- Mortgage rates fell slightly last week:
- 15-year mortgage rates fell 2bps to 2.95%
- 30-year mortgage rates fell 1bp to 3.74%
- 15- and 30-year fixed mortgage rates have now fallen 29 and 32bps year-to-date; however; mortgage rates are 26 and 33bps higher than this time last year.
- Mortgage applications for the week ending August 18 fell 0.5% on a 1.5% drop in purchase apps, a 0.3% increase in refi apps. Looking at the bigger picture, the overall trend for purchase apps has been weaker since mid-June. Refinance activity remains at historically low levels and the Refi Index reveals that burnout dominates an unincentivized population of mortgage holders this year.
New Home Sales Sink in July: The number of new homes sold in July slowed unexpectedly and were much weaker than estimated. The 9.4% month-over-month decline was the sharpest since August 2016, while the 8.9% year-over-year pullback was the largest since June 2014. To be fair, both comparisons were against two of the strongest readings of the current recovery. Nonetheless, the 571k unit annualized pace of sales was the weakest since December and showed declines in three of the four geographic regions.
Existing Home Sales Data Continues to Exhibit Affordability Headwinds: Sales declined 1.3% MoM to a 5.44MM unit annualized pace, the slowest since August 2016. The result was well short of economists’ forecast of a 0.5% gain and capped off a disappointing week for the housing series. Prospective buyers are facing affordability and selection issues as demand remained steady and inventories tightened again. On a YoY basis, inventories were down 9.0% and contracted for a 26th consecutive month. Persistent demand and falling inventories helped the median price rise 6.2% from a year ago. The average YoY pace for price gains in 2017 held at 6.5%, the strongest annual pace since 2013.
Dan Stimpson, CPA
Senior Vice President