FRM Update

August 7, 2017



Mortgage yield spreads were slightly tighter last week and activity was generally slow as the curve flattened 3bps (2s to 10s) and 10-year Treasury yields moved a couple of basis points lower after several disappointing economic reports. Mortgage rates moved lower and mortgage application activity slowed last week. MBS prepayment speeds slowed in July and day count was the main driver behind the decrease. For most portfolio managers, July prepayment speeds should represent a status quo for mortgage-related securities holdings. August MBS prepayments are expected to increase due to an increase in day count. For additional prepayment commentary and charts, please see our July Prepayment Commentary. Housing reports were mixed with pending homes sales rising 1.5%, while construction spending fell 1.3% MoM.

 

MBS





CMOs

Trading activity in CMOs was on the slower side and yield spreads in CMOs were generally unchanged last week. Depositories were focused on stable structures with 4- to 6-year average lives.

 

Rates and Refis



July Prepayment Speeds

July prepayments contained no surprises, decreasing for all three agencies. Day count was the main driver behind this decrease: July contained two less business days than June. Adjusting for day count, July prepayment numbers reverse the increases observed last month. Newer and slightly seasoned MBS slowed much less than more seasoned collateral, especially seasoned, higher-coupon collateral. For most portfolio managers, July prepayment speeds should represent a status quo for mortgage-related securities holdings. August MBS prepayments should increase 15% based on an increase in day count; however, a weak housing market and seasonal factors will likely result in a less than 15% increase in prepayments. For additional prepayment commentary and charts, please see our July Prepayment Commentary.



Housing

Pending Home Sales Beat Expectations in June, Remain Choppy:  June’s Pending Home Sales report beat expectations of a 1.0% gain, growing 1.5%. Pending sales were notably strong in the West (+2.9% MoM) and the South (+2.1%). On a year-over-year basis, pending sales in the Northeast and South have been the strongest rising 2.9% and 2.6%, respectively. Based on the pending sales report, it appears that existing home sales are likely to be flat in July with strength in the South and West offset by weakness in the Midwest.



Construction Spending Disappoints, Could Detract in 2Q GDP Revisions:  June’s construction spending data was much weaker than expected, falling 1.3% MoM, and a slight positive revision to May’s data was offset by a much larger negative revision to April’s results. The net effect is likely to be a modest negative revision to 2Q growth. The biggest drop occurred in public construction spending, which fell 5.4% from May. Multifamily activity drove the disappointment in private residential spending and offset a modest gain in spending on single family residences.



 

 


Dan Stimpson, CPA

Senior Vice President

Vining Sparks

INTENDED FOR INSTITUTIONAL INVESTORS ONLY.
The information included herein has been obtained from sources deemed reliable, but it is not in any way guaranteed, and it, together with any opinions expressed, is subject to change at any time. Any and all details offered in this publication are preliminary and are therefore subject to change at any time. This has been prepared for general information purposes only and does not consider the specific investment objectives, financial situation and particular needs of any individual or institution. This information is, by its very nature, incomplete and specifically lacks information critical to making final investment decisions. Investors should seek financial advice as to the appropriateness of investing in any securities or investment strategies mentioned or recommended. The accuracy of the financial projections is dependent on the occurrence of future events which cannot be assured; therefore, the actual results achieved during the projection period may vary from the projections. The firm may have positions, long or short, in any or all securities mentioned. Member FINRA/SIPC.
Copyright © 2021
Member FINRA/SIPC
This is a publication of Vining-Sparks IBG, L.P.
775 Ridge Lake Blvd., Memphis, TN 38120