February 14, 2022
Current Yield Spreads
Another hot inflation report and hawkish commentary from the Fed sent Treasury yields much higher last week and led markets to price in six rate hikes this year. January’s CPI report was hotter than expected; 0.6% MoM gains for both headline and core lifted the respective YoY rates from 7.0% to 7.5% and from 5.5% to 6.0%, both the fastest since 1982. Fed’s Bullard wants the fed funds rate to be 1.00% higher by July 1 (the Fed has three meetings scheduled between now and then) and for balance sheet runoff to begin in 2Q. On Thursday the 2-year Treasury yield rose 21.5 bps to 1.58%, (sharpest jump since June 2009, highest since January 2020) as futures priced in a year-end fed funds rate of 1.72%, up from 1.45% Wednesday; futures also priced in ~80% chance of 50-bp March hike.
MBS yield spreads widened in response to the market volatility and fears of how the Fed’s balance sheet unwind may potentially impact MBS pricing. Nominal yield spreads on 15-year MBS current coupon production widened 5 bps to 24 bps, while yield spreads on 30-year MBS to Treasurys with similar duration widened 9 bps to 81 bps. Yield spreads on 30-year MBS are now 19 bps above the average of 62 bps over the past year.
The summary below reflects customer purchase activity from the previous week. Buying activity was robust as investors took advantage of the market sell-off and wider spreads. Activity was evenly distributed between 15-, 20-, and 30-year UMBS securities. The majority of the 30-year activity was centered on 25-year new production 2.0s and 2.5s. Buying remained modest in 10-year passthroughs since spreads remain relatively tight. There was also healthy activity in 15- and 30-year GN Jumbo 2.0s and 2.5s.
Mortgage Rates & Applications
Mortgage interest rates continued to march higher last week but at a reduced pace. The 30-year rate increased 5 bps to 4.00% and the 15-year rose 3 bps to 3.34%. The 30-year mortgage rate has increased 81 bps over the past seven weeks and 115 bps from the cycle low of 2.85% (Feb 2021). Rising rates have contributed to weakness in applications for refis and volatility in purchases apps. Overall applications for the week fell 8.1% after climbing 12.0% in the previous week. Refi apps fell 7.3% while purchase apps disappointingly fell 16.7%.
Rising mortgage rates have dampened prepayment activity as seen in the February report that reflected activity during January. 30-year Fannie prepayments for January decreased by 21% to 14.8 CPR and 30-year Freddie prepays dropped by 19% to 13.4 CPR. See here for our complete prepayment commentary.
Michael S. Erhardt, CPA
Senior Vice President, Investment Strategies