FRM Update

December 17, 2018



Despite the considerable volatility in risk assets, yield spreads on current production coupons compared to Treasuries were relatively stable during the past week.  The new trading range is still being mapped out, but the 2018 basis widening for MBS combined with higher Treasury yields has presented investors with more attractive valuations compared to levels seen in recent years.  Yield spreads for 15-year MBS have improved 21 bps during the last year, while spreads on 30-year MBS have expanded 25 bps over the same time period.



Activity has picked up in recent weeks, likely because institutions are preparing their balance sheets for year-end and positioning their portfolios for improved performance.  We’ve seen institutions selling odd-lot positions and/or lower yielding securities at a break-even or loss, and using proceeds to purchase higher yielding securities. The timing of repositioning is ideal for many financial institutions as earnings are up considerably in 2018 compared to the previous year, which provides a cushion for absorbing losses.

Last week activity was split almost evenly among the 15-year and 30-year sectors.  This is unusual because financial institutions tend to prefer shorter duration pools.  However, we are beginning to see select institutions add duration to protect their exposure to declining rate scenarios. The following represents a summary of the activity last week:




Mortgage Rates and Refinance Activity



Housing:

Signs of Life in Mortgage Applications: Mortgage applications for the week ending December 7 rose 1.6% on a 2.5% increase in purchase apps and a 1.8% increase in refi apps.  The recent pullback in mortgage rates is generating a small bit of mortgage activity.  The 4-week moving average for purchase applications has now bounced 9% over the past month.



Michael S. Erhardt, CPA

Senior Vice President, Investment Strategies

Vining Sparks IBG, LP

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