FRM Update

February 16, 2021

Fed Support

The Federal Reserve’s aggregate mortgage buying last week totaled $32.5bn.  The most heavily purchased securities were 30-year UMBS 2.0s and 1.5s with total volumes of $15.1bn and $5.7bn, respectively. The Fed will target up to $61.9bn in MBS from Feb. 12 to Feb. 26. The last cycle saw it target $59.7bn.

The Fed is unlikely to “even think about withdrawing policy support” by raising rates or reducing its bond purchases for the foreseeable future, Mr. Powell said in a speech last week to the Economic Club of New York.  Powell noted that, “The balance sheet will be the size that it needs to be to provide support to the economy.” Eventually, he went on, “we will return to a place gradually and with tons of transparency and not any time soon.”

Current Yield Spreads

Current coupon MBS (15-year 1.5s and 30-year 2.0s) outperformed Treasuries with similar duration last week. Nominal spreads on 15-year MBS to Treasurys tightened 4 bps to 38 bps while 30-year MBS tightened 2 bps to 78 bps.

Trading Activity

The summary below reflects purchase activity from the previous week.  Activity was led by UMBS 25- and 30-year 1.5s, followed by UMBS 15-year 2.0s.

TBA-Eligible Securities:

Non-Deliverable Securities:

Specified Pools:

Given robust refinance activity,  portfolio managers continue to seek prepay protection to avoid potentially low or negative yields.  Many investors have turned to specified pools (lower loan balances, NY/FL collateral, investor loans) to help partially mitigate faster prepay speeds. The graph below highlights monthly prepayment speeds on different collateral types.

Prepay Friction – 30-Year 2.5s of 2020

Mortgage Rates and Applications

According to the weekly rate survey, mortgage rates were relatively stable last week, despite the bond market sell-off that pushed the 10-year Treasury yield higher by 4.5 bps to 1.21%. The 15-year mortgage rate declined 1 bp to 2.34% and the 30-year rate increased 1 bp to 2.86%.

Mortgage application volume decreased 4.1% during the week ended Feb. 5, according the Mortgage Bankers Association’s survey. Applications for refinances decreased 4% compared with the previous week while applications for purchases decreased 5%. On a year over year basis, applications for refinances were up 46% while applications for purchases were up 17%.

According to some estimates, nearly 80% of the conventional market has a refinance incentive of at least 50 bps with a sub 3.00% 30-year mortgage rate.

The primary/secondary mortgage spread (average 30-year mortgage rate minus 30-year MBS current coupon) held firm at 1.45%. The spread has narrowed 50 bps since the first week of August and nearly 60 bps since hitting a high in early March.  The narrowing has been due to the mortgage industry adding headcount and capacity. A reversion to the 5-year average of 1.22% would result in an additional reduction of 23 bps in 30-year mortgage rates.

Michael S. Erhardt, CPA

Senior Vice President, Investment Strategies

Vining Sparks IBG, LP

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