February 10, 2020
Nominal spreads compared to Treasurys were mixed last week, with 15-year tightening 3 bps to 57 bps and 30-year widening 3 bps to 95 bps. Valuations continue to be attractive in the mortgage space, especially for 15- and 20-year pools. The Z-spread on 15-year 3.0s is currently at 50 bps, recovering from a low in mid-January of 42 bps, and much improved from one year ago at just 31 bps.
Prepayment speeds for January were released last week, and speeds declined broadly from December, but remain somewhat elevated. Some of the decline was seasonal in nature. As we transition into the spring season, we could see an uptick in prepayments, as rates remain supportive. The refinancing index has advanced to just under 3,000, more than doubling the 1,375 level from five weeks ago. The four-week moving average of the refi index now rests at 2,600, matching its peak last August. Please see here for a complete commentary on recent prepayment speeds.
The Treasury market rally has generated strong two-way flow (buying and selling). Financial institutions have been active repositioning (primarily extension swaps) and taking gains. The beginning of the year is always conducive to repositioning as you have the entire year available to realize the impact from gains and/or losses.
Last week the general market was focused on buying 15-year 2.0s and 20-year 4.0s, which drove spreads tighter in these sectors/coupons. As a result, we saw our customers buying both new-production and seasoned 20-year 3.0s. Newer-production 20-year 3.0s continue to offer the widest spreads along the coupon stack in this sector, and can be purchased with a lower pay-up to TBA than 2.5s. We also saw continued investment by depositories in 15-year 2.5s and 3.0s.
Mortgage Rates and Refinance Activity
Mortgage rates were relatively stable last week and remain low, with 15-year declining 2 bps to 3.12% and 30-year declining 1 bp to 3.62%. Supportive mortgage rates drove overall mortgage applications 5% higher from the previous week, the highest level since May 2013. The refinance index spiked 15% to the highest level since June 2013. Compared to a year earlier, the index is 183% higher. The purchase index fell by 10% as buyers continue to face the challenge of sparse inventory.
Michael S. Erhardt, CPA
Senior Vice President, Investment Strategies
Vining Sparks IBG, LP