FRM Update

August 6, 2018



During the past week, yield spreads on current production MBS tightened slightly to both Treasuries and Swaps.  Interest rates remained in a relatively narrow range and volatility was subdued, despite a Fed meeting and payroll release.  15-year MBS yield spreads to Treasuries were tighter by 1 to 2 bps, while 30-year MBS spreads moved tighter to Treasuries by 2 to 3 bps.

Flows were steady last week, with investors adding defensive style cash flow structures. Seasoned 15-year 2.5s and 3.0s were the most actively traded structure among depositories.  There was also some selling of factored down pools, as the bid side remains relatively strong for odd-lot positions.

The following represents a summary of the activity we observed last week:




Mortgage Rates and Refinance Activity



Housing:

Mortgage Applications: Mortgage applications for the week ending July 27 declined 2.5% from the previous week and 12.0% from one year ago.  Purchase applications dropped 3.0% and refi applications declined 2.0% for the week. Purchase applications have now decreased for the third week and the purchase index was at its lowest level in a month as low housing inventory and rising home prices continue to weigh on demand.

Pending Home Sales Offer Glimmer of Positivity in a Recent Run of Unspectacular Housing Data: Pending home sales, counted when contracts on existing homes are signed, rose in June for the first time since March. Total pending sales, a leading indicator for actual existing sales, rose 0.9% last month and offered a glimmer of hope for some stability in existing sales in the months ahead. Contracts signed in the Northeast and Midwest rose at a slower pace than in May but pending sales in the South, the largest region by volume, rebounded 1.1% from the prior month’s 3.5% decline. Activity in the West was relatively steady. While the monthly improvement certainly provides a positive data point, less sanguine longer-term trends show how disappointing overall activity has been in recent years. In addition, key headwinds remain that should make a more lasting turnaround tougher to achieve. Freddie Mac data showed the average 30-year mortgage rate offered to borrowers remains near the top of a seven-year range, 4.54% for the week ended July 26, and June’s existing sales report from last week showed prices at new records.

Construction Spending Falls on Weak Public Educational, Multi-Family Residential, and Non-Residential Commercial Spending: Construction spending in June disappointed expectations, falling 1.1% on a big 3.5% decline in public spending, a 0.5% decline in residential construction, and a 0.3% drop in non-residential construction.  While the June data disappointed, the April and May data were revised notably higher meaning the initial 2Q GDP estimates should remain reasonably accurate.  Also positive, manufacturing-sector construction rose a hearty 1.2% and home improvement spending increased 0.1%.  On the negative side, commercial construction saw an unusually weak month dropping 2.2%, multi-family residential activity fell 2.8% and continued to hover around a 0.0% YoY growth rate, and public educational construction fell off a cliff (-11.0% MoM).  More broadly, while the overall trends for most construction categories remain positive, the June results do point to a weaker pace of activity heading into 3Q.



Michael S. Erhardt, CPA

Senior Vice President

Investment Strategist

Vining Sparks, IBG

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