December 7, 2020
The Fed’s aggregate mortgage buying last week totaled $35.1bn. The most heavily purchased was 30-year UMBS 2.0s and 1.5s with volumes of $17.9bn and $3.5bn, respectively. The Federal Reserve will target up to $58.8bn MBS from Dec. 1 to Dec. 11, compared to the last cycle of $65.4bn. Gross purchases of MBS have now reached over $1.3tn during this round of QE.
Current Yield Spreads
Yield spreads on current coupon MBS compared to Treasurys with similar duration were mixed last week. Nominal spreads on 30-year MBS to Treasurys widened 5 bps to 71 bps, while 15-year MBS tightened 4 bps 38 bps. Spreads have tightened 7 bps over the past month.
The summary below reflects trading activity from last week, which was led by UMBS 15-year 2.0s and UMBS 20-year 1.5s.
- UMBS 10-year 1.5s & 2.0s
- UMBS 15-year 1.5s to 2.5s (2.0s the most traded)
- UMBS 20-year 1.5s & 2.0s (1.5s the most traded)
- UMBS 30-year 1.5s & 2.5s (2.5s the most traded)
- FNMA 15-year Jumbos 1.5s
- FNMA 30-year Jumbos 1.5s to 3.0s (2.0s the most traded)
- 15- and 30-Year 1.5s to 3.0s LLB Pools ($85k -$200k max loan size)
- Custom CRA Pools
Given robust refinance activity, portfolio managers continue to seek prepay protection to avoid potentially low or negative yields. Many investors have turned to specified pools (lower loan balances, NY/FL collateral, investor loans) to help partially mitigate faster prepay speeds. The graph below highlights monthly prepayment speeds on different collateral types.
Prepay Friction – 30-Year 3.0s of 2019
Mortgage Rates and Refinance Activity
Mortgage rates declined last week according to the Bankrate.com survey. The 30-year fixed-rate mortgage declined 3 bps to 2.92% while the 15-year mortgage rate decreased 6 bps to 2.39%. According to the weekly Freddie Mac survey, the average on the 30-year fixed-rate mortgage dropped 1 bp to a new record low of 2.71%
Mortgage applications for the week ending November 27 fell 0.6% as a 4.6% drop in refis outsized a 9.0% gain in purchase applications. With this report’s bounce, purchase applications are now at their highest level since July 2008. Both purchase and refi applications remain at high levels portending continued strength in the housing sector.
The primary/secondary mortgage spread (average 30-year mortgage rate minus 30-year MBS current coupon) decreased 2 bps last week to 1.52%. The spread has narrowed nearly 50 bps since the first week of August. Lenders are likely to tighten spreads further if Treasury rates backup in order to sustain revenue.
Michael S. Erhardt, CPA
Senior Vice President, Investment Strategies
Vining Sparks IBG, LP