December 16, 2019
Yield spreads for current-coupon MBS to comparable Treasurys were relatively stable last week, as 15-year held firm at 64 bps and 30-year tightened by 3 bps to 95 bps.
The story in pass-throughs continues to be one of relative value, with spreads remaining near multi-year highs, due primarily to much lower interest rates and the resulting increase in supply for most of the year. For example, the Z-spread on 15-year 2.5s has increased 32 bps from 24 bps in April to a current value of 56 bps. The spread on 30-year 3.0s has increased 37 bps from a low of 55 bps to 92 bps.
Investors were active last week, adding 15- and 20-year mortgage pools with lower coupons. Activity in 15-year pools was focused on new production 2.0s, while most of the activity in the 20-year sector was in 3.0s. The pay-up over TBA for 20-year 2.5s has essentially doubled from the beginning of October, so 20-year 3.0s have become a better alternative.
There continues to be strong demand for non-deliverable pools collateralized by jumbo loans. These pools normally trade below the price of TBA-eligible pools, due to the obvious liquidity disadvantage and greater level of negative convexity. But more recently, pricing has been impacted by record levels of issuance. After a slow start at the beginning of 2019, issuance of 100% jumbo pools hit a record-high in October of over $7bn. The increased supply has cheapened the product further, which has stimulated demand from investors seeking higher yields. Attractive yields can be found in 2.5s and 3.0s with slightly better OAS profiles than TBA-eligible paper.
Mortgage Rates and Refinance Activity
Mortgage rates were relatively stable for the week ending December 13th, with 15-year firm at 3.18% and 30-year decreasing 4 bps to 3.69%. During 2019, 30-year rates have declined 91 bps and 15-year have fallen by 59 bps.
With mortgage rates continuing to hover near historic lows, mortgage applications picked up by 3.8% for the week ending December 6th. Applications to refinance a home jumped 9% for the week and were 146% higher than the same week one year ago. The refinance share of mortgage activity increased to 62.4% of total applications from 59.0% the previous week. Mortgage applications to purchase a home fell 0.4% for the week but were 5% higher than a year ago.
Michael S. Erhardt, CPA
Senior Vice President, Investment Strategies
Vining Sparks IBG, LP