December 9, 2019
Yield spreads for current-coupon MBS to comparable Treasurys held relatively stable, as 15- and 30-year MBS tightened by 1 bp to 64 bps and 98 bps, respectively.
December prepayment speeds were released last week, and as expected we saw a broad decline in speeds. This was expected given higher mortgage rates during the refinancing window, which was approximately mid-October to mid-November. Also factoring in were fewer business days and lower turnover, a seasonal event as fewer homes are sold this time of the year. See here for our December MBS Prepay Commentary.
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.
Financial institutions were active last week, adding 15- and 20-year mortgage pools with lower coupons. Activity in 15-year pools was focused on 2.0s to 3.0s, while most of the activity in 20-year was in 2.5s and 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 might be a better alternative at this point.
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 be partially alleviated by focusing on 3.0s, which offer better nominal yields, but slightly lower OAS returns versus 3.5s.
Mortgage Rates and Refinance Activity
Mortgage rates were stable for the week ending December 6, with the 15-year at 3.18% and 30-year at 3.73%. During 2019, 30-year rates have declined 87 bps and 15-year have fallen by 59 bps.
Mortgage applications for the week ending November 29 fell 9.2% on a 15.2% drop in refinance apps. While refinancing activity has slowed a bit from September, activity remains up over 170% from the trough back in late-2018. Purchase apps, meanwhile, rose 0.9% and continue to point to positive housing activity.
Michael S. Erhardt, CPA
Senior Vice President, Investment Strategies
Vining Sparks IBG, LP