December 2, 2019
Yield spreads for current coupon MBS to comparable Treasurys held relatively firm last week as the broader market continued to trade in a tight range. Both 15- and 30-year MBS tightened by 1 bp to 65 bps and 99 bps, respectively.
The story in pass-throughs continues to be one of relative value, with spreads remaining near multi-year highs, due primarily to much lower rates and the resulting increase in supply for most of 2019.
Financial institutions were active last week prior to the holiday, adding 15- and 20-year mortgage pools with lower coupons. Also, 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. Premium risk can partially mitigated by focusing on 2.5s and 3.0s, which offer better nominal yields but slightly lower OAS returns versus higher coupons.
The following is a list of actively traded sectors and coupons from the previous week:
- 15-Year 2.0s to 3.0s – The most prominent trade was in 15-year 2.0s, which are trading below par.
- 20-Year 2.5s to 3.5s – Newer-production 2.5s & 3.0s continued to be a popular choice with investors seeking yield and lower dollar prices. 20-year 2.5s can be purchased near par.
- Off-The-Run-Collateral – Buyers seeking higher yields focused on 30-year pools (UMBS & GN) collateralized by jumbo loans with relatively low coupons.
- CMBS – The focus for CMBS (Fannie DUS & Freddie Ks) has been on 5- to 10-year finals. This sector has been well-liked by investors seeking locked-out cash flow, positive convexity, and higher yields.
- CRA Targeted Pools – Traded several MBS pools created for financial institutions seeking eligible credit for compliance with the Community Reinvestment Act.
Mortgage Rates and Refinance Activity
30-year mortgage rates edged up 3 bps to 3.73% for the week ending 11/29/2019, while 15-year rates held firm at 3.18%. For the year, 30-year rates have declined 87 bps and 15-year have fallen by 59 bps.
Refinance volume helped push total mortgage application volume up 1.5% for the week ending 11/22/2019 compared to the previous week. Mortgage applications to refinance a home rose 4% for the week and were 3.14% higher compared to the same week one year ago. However, this week’s annual comparisons are somewhat skewed, because the results are being compared to the week of Thanksgiving 2018, as the holiday fell one week earlier last year.
Michael S. Erhardt, CPA
Senior Vice President, Investment Strategies
Vining Sparks IBG, LP