FRM Update

August 9, 2021

Current Yield Spreads

Nominal yield spreads on 15-year MBS (1.5s) to Treasurys with similar duration widened by 5 bps to 42 bps, while yield spreads on 30-year MBS (2.0s) widened 4 bps to 70 bps. Higher coupons performed better on the week as 30-year 3.5s tightened 3 bps and 30-year 4.0s tightened 9 bps. The demand for higher coupons seems to be coming from CMO traders and investors anticipating a further slowing of prepayment speeds due to burnout among borrowers.

Spreads on current-coupon mortgages may have widened for several reasons including, the strong payroll report on Friday that suggested the Fed continues to make progress towards its goals and an eventual taper, slightly lower levels of Fed support (QE) during July, and investors could be scaling back MBS purchases because of the Treasury rally this summer.

The Fed purchased $98.2 billion in agency MBS during July, the lowest amount for any calendar month since March 2020, and a decline of approximately 11% from the previous month.  The decline is due to the recent slowdown in prepayments and less cash flow that must be reinvested to maintain the net target of $40 billion per month.

Trading Activity

The summary below reflects purchase activity from the previous week.  Activity was concentrated in the 15- and 20-year sectors with low coupons.  There was also a strong pick-up in 30-year pools collateralized by Jumbo mortgages.

TBA-Eligible Securities:

Non-Deliverable Securities:

Specified Pools:

Mortgage Rates and Applications

U.S. mortgage rates finally reversed course and moved higher for the week according to  Both 15- and 30-year mortgage rates increased 5 bps to 3.03% and 2.33%, respectively.   The 15-year rate remains near a record low.

Mortgage applications for the week ending July 30 fell 1.7% despite the average 30-year mortgage rate falling slightly during the survey period.  Both purchase applications and refi applications fell 1.7% for the week and remain down 27% and 22% from January, respectively.

The July prepayment speed report showed that aggregate Fannie Mae 30-year speeds dropped approximately 10% compared to the previous month.  Accounting for a portion of the drop was a reduction in the number of business days, which fell about 5% to 21.  Investors seem to be sensing some burnout in higher coupons as spreads tightened meaningfully on the week in 30-year 3.5s and 4.0s. Please see here for our complete commentary on prepayments.

Michael S. Erhardt, CPA

Senior Vice President, Investment Strategies

Vining Sparks IBG, LP

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