February 11, 2019
Yield spreads on current production MBS to Treasuries were mixed on the week but remain relatively stable over the past month.
In Case You Missed It:
Vining Sparks: MBS Prepayment Commentary
The following represents a summary of the activity last week:
- 15yr MBS activity was centered in current production 15-year 4.0’s. Although spreads have contracted slightly, these pools are trading at approximately 80 basis points over the Treasury curve based on consensus prepayment speeds. Premium averse buyers have generally opted for 3.5’s trading in the mid-$101 range.
- Lower coupon pools such as 15-year 2.5’s (150 WAM) have also been in demand and are generally being traded at par or less. These seasoned pools tend to have less negative convexity and exhibit better projected performance in a declining rate environment versus higher coupons.
- Recent activity has started shifting towards higher coupons.
- Activity has picked up within this space over the past two months as depositories have focused on adding duration in order to address down rate exposure. Tax reform and basis tightening in Municipals has also led some investors to consider longer term MBS. A recent Strategic Insight on this topic can be found here.
- Other trades included several custom GNMA pools designed to help depositories meet their Community Reinvestment Act (CRA) goals for 2019.
- The focus for FNMA DUS has generally been longer finals (7-12 years). This has been a prevalent trade for investors seeking locked-out cash flows, positive convexity, and higher yields.
- Investors seeking Freddie K’s have been focusing on 3- to 5-year finals, which offer attractive spreads over the Treasury curve.
Mortgage Rates and Refinance Activity
- Benchmark mortgage rates decreased from the previous week.
- 15-year mortgage rates decreased 3bps to 3.68%, the lowest level in nine months
- 30-year mortgage rates decreased 4bps to 4.35%, the lowest level in five months.
Kevin A. Smith, CFA
SVP, Director Investment Product Strategies
Vining Sparks IBG, LP