FRM Update

February 19, 2019

Yield spreads on current production MBS to Treasuries were mixed, with 15-year pools ending the week 1 basis point tighter and 30-year pools 1 basis point wider, as Treasury prices declined modestly. In terms of activity, investors have primarily focused on adding 15- and 20-year pools and CRA eligible 30-year GNMA pools.

In Case You Missed It:

Vining Sparks: MBS Prepayment Commentary

The following represents a summary of the activity last week:

15-Year MBS

• The bulk of trading activity has occurred in 15-year pools, with nearly every coupon represented across the coupon stack.  Nearly half the trades were in current production 15-year 4.0’s and 4.5’s.  These pools are trading at approximately 75-80 basis points over the Treasury curve based on consensus prepayment speeds.  Premium reluctant buyers have steered towards 3.0’s or 3.5’s trading closer to par.
• Lower coupon pools such as 15-year 2.0’s and 2.5’s have also been in demand and are generally being traded well below par. These seasoned pools tend to have less negative convexity and exhibit better projected performance in a declining rate environment versus higher coupons.

20-Year MBS

• Over the past two weeks, investors have been active in current production 20-year 4.0’s.  These pools are trading at approximately 85-90 basis points over the Treasury curve based on consensus prepayment speeds.

30-Year MBS

• Activity has picked up within this space over the past two months as depositories have focused on adding duration in order to address declining 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.

CMBS

• 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 2bps to 3.66%, the lowest level in nine months.
  • 30-year mortgage rates increased 4bps to 4.39%, the lowest level in five months.

Michael S. Erhardt, CPA

Senior Vice President, Investment Strategies

Vining Sparks IBG, LP