February 24, 2020
Nominal spreads on current coupon MBS compared to Treasuries were wider last week, with both 15- and 30-year widening 3 bps to 63 bps and 98 bps, respectively. As spreads have widened in recent weeks, we have seen strong demand for 15- and 20-year pools with relatively low coupons. This reflects the fact valuations look relatively attractive and the appeal of sticking to cash flow product given the magnitude of the Treasury market rally. 10- to 15-year pools tend to be more forgiving with rising rate scenarios due to heavy scheduled cash flow compared to longer non-amortizing structures. In terms of relative value, Z-spreads on 15-year 2.5’s are currently at 66 bps, having more than doubled from 24 bps this time last year.
The Treasury market rally has generated strong two-way flow (buying and selling). Financial institutions have been active repositioning (primarily extension swaps) and taking gains. The beginning of the year is always conducive to repositioning as you have the entire year available to realize the impact from gains and/or losses.
Investors were active last week and added the following:
- 15-Year 2.0’s and 2.5’s
- 20-Year 2.5’s and 3.0’s
- New and seasoned 30-Year 2.5’s to 4’0s
- 30-Year Jumbo 3.5’s
Mortgage Rates and Refinance Activity
Mortgage rates increased slightly last week, with 15-year rising 4 bps to 3.17% and 30-year increasing 4 bps to 3.68%. Mortgage applications for the week ending February 7 rose 1.1% on a 5.8% decline in purchase applications and a 5.0% increase in refinancing activity. The four-week average for refinancing applications is now up 60% and the average for purchases is up 13% from one-month prior levels.
Michael S. Erhardt, CPA
Senior Vice President, Investment Strategies
Vining Sparks IBG, LP