December 11, 2017
Treasury yields moved a couple of basis points higher across the curve last week, and mortgage yield spreads were tighter versus Treasuries and remain historically tight. Mortgage rates fell and mortgage applications rose 4.7% on the back of a 9.0% jump in refinancing activity. MBS prepayment speeds in November fell as expected, with both FNMA and FHLMC 30yr MBS speeds decreasing 10% in fractional terms. Next month’s prepayments are expected to decrease from one-day lower day count and higher mortgage rates. For additional prepayment commentary and charts, please see our November Prepayment Commentary.
- Mortgage yield spreads tightened last week:
- 15-year MBS yield spreads ended the week 3 to 6bps tighter to Treasuries and swaps.
- 30-year MBS yield spreads ended the week 1 to 2bps tighter to Treasuries and swaps.
- Curve slope measured by 2- and 10-year Treasuries was unchanged last week at 58bps.
- Investors were active last week in 15yr MBS, primarily 3.0% coupons, in both conventional and relo collateral.
- A combination of higher yield versus agency bullets and deference to convexity inspired activity in seasoned 5yr and new 7yr multi-family FNMA DUS and Freddie K’s.
CMO spreads tightened in various types of structures last week, while activity in CMOs slowed compared to recent levels. Investor focus was primarily in shorter PAC structures offering extension protection. Full coupon front sequential structures off of 30yr 3.5% collateral (“3.5 squared”) remained popular with financial institutions with wider spreads and was in better supply than many shorter structures. Odd lot cleanup activity has also increased as investors approach year-end.
Mortgage Rates and Refinance Activity
- Mortgage rates fell last week to levels close to their respective YTD averages.
- 15-year mortgage rates fell 2bps to 3.14%, 4bps above the YTD average 3.10%.
- 30-year mortgage rates fell 7bps to 3.80%, 8bps below the YTD average 3.88%.
- 15- and 30-year fixed mortgage rates have fallen 10 and 26bps year-to-date.
- Mortgage applications for the week ended December 1 rose 4.7% on the back of a 9.0% jump in refinancing activity, the strongest weekly jump since July, following two weekly dips to close out November. Purchase activity also picked up with applications rising 2.4%, compared with 1.8% the week before, and extending a run of increased purchase activity for a fifth consecutive week.
- The MBA Refi Index increased 9.0% to 1314, slightly below its YTD average of 1350; however, refinance activity continues to be historically low and range-bound, holding far below levels of 2016. The Index reached a year-to-date high the week ending September 8th at 1637; however, the Refi Index has fallen ten of the last thirteen weeks.
November Prepayment Speeds
November completely erased the increases observed last month, and then some. Both FNMA and FHLMC thirty-year MBS speeds decreased 10% in fractional terms, while fifteen-year collateral decreased 9% and 7%, respectively. GNMA slowed less than FNMA and FHLMC. Mortgage rates increased slightly for the preceding couple of months, which helped to suppress refinancing activity. Next month’s prepayments are expected to decrease. December has one less business day than November, and mortgage rates continue to increase, especially fifteen-year rates. For additional prepayment commentary and charts, please see our November Prepayment Commentary.
Dan Stimpson, CPA
Senior Vice President