February 12, 2018
Mortgage-related security yield spreads versus Treasuries widened again last week, as volatility continues during the selloff in the financial markets. Mortgage rates were up one basis point last week and have increased 45bps this year. MBS prepayments slowed for the third consecutive month, declining for seasoned and new production and for high and low coupons. Weighing all factors involved, investors should expect slower prepayments again next month. For additional prepayment commentary and charts, please see our January MBS Prepayment Commentary.
- Mortgage yield spreads widened again last week, continuing the widening trend experienced over the last month:
- 15-year MBS yield spreads ended the week 4 to 6bps wider to Treasuries and swaps.
- 30-year MBS yield spreads ended the week 3 to 6bps wider to Treasuries and swaps.
- Curve slope measured by 2- and 10-year Treasuries steepened 8bps last week from 69 to 77bps; well above the low point of 49bps in early January.
- Investors were active in seasoned 30yr MBS, primarily in 3.5% coupons in HLTV collateral, which offer attractive yields and spreads in the sector.
- Investors were also active in seasoned 20yr MBS, primarily in 3% and 3.5% coupons and in newer 4% coupons. 15yr MBS, generally in lower coupons at discount prices, were also attractive to investors last week.
- A combination of higher yield versus agency bullets and deference to convexity inspired activity in seasoned multi-family FNMA DUS offered at below par prices.
CMO yields have increased during the last two weeks, and for typical bank-type structures yields of 3.00% or higher are attainable. CMO yield spreads widened by one to two basis points on shorter structures, but the spread widening was more pronounced and in line with the widening in fixed MBS in longer structures. Investor activity is focused on structures that offer 3% yields and weighted average lives around five years in sequential and VADM structures.
Mortgage Rates and Refinance Activity
- Mortgage rates rose slightly last week compared to the 17 to 20bps increase in mortgage rates the prior week.
- 15-year mortgage rates rose 1bps to 3.64%, 51bps above the 12-month average of 3.13%.
- 30-year mortgage rates rose 1bps to 4.31%, 43bp above the 12-month average of 3.88%.
- 15-year mortgage rates have risen 44bps in 2018, while 30-year mortgage rates are up 46bps YTD.
- Mortgage applications for the week ending February 2nd rose 0.7% after falling 2.6% the prior week. Purchase apps were unchanged after falling 3.4% the prior week. Refi apps increased 0.9% after falling 2.9% the prior week.
- The MBA Refi Index rose 0.9% to 1299, slightly below its 12-month average of 1346. Refinance activity continues to be historically low and range-bound averaging a low index level of 1269 in 2018.
January MBS Prepayment Speeds
MBS prepayments slowed for the third consecutive month, declining for seasoned and new production and for high and low coupons. While most projections called for a slowdown, speeds fell more than expected. For the pertinent application period mortgage rates ended December near the highs for the prior six months. Seasonal factors added to the braking impact of the slow upward grind in mortgage rates, and the business calendar did nothing to offset these impacts, with one additional business day in January. February has two fewer business days compared to January, which should result in about a 10% decrease. Weighing all factors involved, investors should expect slower prepayments again next month. For additional prepayment commentary and charts, please see our January MBS Prepayment Commentary.
Dan Stimpson, CPA
Senior Vice President