August 5, 2019
Mortgages were largely able to keep pace with strengthening Treasury prices last week as yield spreads for current production coupon MBS to Treasurys remained stable. Although, there was some widening experienced in higher-coupon pools.
Activity over the past week has been concentrated in 15- and 20-year MBS and 30-year pools collateralized by non-conforming jumbo loans (3.0s and 3.5s). Investors continue to focus on lower-coupon pools because of prepayment risk, despite the fact that higher coupons offer superior projected option-adjusted spreads.
The following is a list of actively traded sectors and coupons:
- Seasoned 15-Year 2.0s – 2.0s remain the only coupon trading under par and offer relatively-attractive spreads with rates unchanged or declining-rate environments.
- 15-Year 3.0s – Investors focused on current-production pools with modest premiums ($102.50 to $103.00 range).
- 20-Year 2.5s to 3.5s – Newer-production 20-year pools offer higher projected yields, and tend to perform relatively well in stable to rising interest rate scenarios.
- Off-The-Run-Collateral – Buyers seeking higher yields have focused on MBS pools collateralized by non-conforming jumbo loans and pools of relocation loans. Relocation loans are often considered a complement to traditional TBA pools. Expected prepayments tend to be more dependent on time rather than the relative level of market rates. This provides some level of resistance to refinance activity and limited extension risk.
- CMBS – The focus for CMBS (Fannie DUS & Freddie Ks) was on finals in the 10- to 12-year range. This has been a prevalent trade for investors seeking locked-out cash flow, positive convexity, and higher yields.
Mortgage Rates and Refinance Activity
The Treasury rally sent benchmark mortgage rates lower last week. 15-year mortgage rates declined 6 bps to 3.14%, while 30-year mortgage rates decreased 5 bps to 3.82%.
Mortgage applications fell 1.4% for the week ending July 26. The purchase index decreased by 3.0% from one week earlier, but was 6.0% higher than the same week one year ago. While the purchase activity index was up 6.0% from one year ago, the index has now decreased for three straight weeks and reached its lowest point since March. The refinance index inched up 0.1% from the previous week and was 84.0% higher than the same week one year ago, when rates were significantly higher. The refinance share of mortgage activity increased to 50.5% of total applications from 49.8% the previous week.
Michael S. Erhardt, CPA
Senior Vice President, Investment Strategies
Vining Sparks IBG, LP