February 25, 2019
Yield spreads on current production MBS to Treasuries were mixed last week with 15-year ending the week unchanged at 48 bps, while 30-year tightened 3 bps to 75 bps. The lack of volatility along with consistent investor demand has driven spreads tighter this month by 3 to 5 bps.
The following represents a summary of the activity last week:
- Investors seeking yield and consistent cash flow have added current production 3.5’s and 4.0’s.
- The majority of trading activity has occurred in 15-year pools, with nearly every coupon represented across the coupon stack. More than 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.
- We’ve seen buying in both seasoned and new production pools. Most of the activity has been 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.
- 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.
- An active trade has been in current production GN II 5.5’s that offer a projected yield of 3.52% and a spread of over 100 bps to Treasuries based on consensus speeds.
- Other trades included several custom GNMA pools designed to help depositories meet their Community Reinvestment Act (CRA) goals for 2019.
- The focus for CMBS (Fannie DUS & Freddie K’s) has generally been on discounted pools with finals in the 7-year range. This has been a prevalent trade for investors seeking locked-out cash flow, positive convexity, and higher yields.
Mortgage Rates and Refinance Activity
- Benchmark mortgage rates were mixed last week and remain relatively low.
- 15-year mortgage rates increased 1bp to 3.67%, the lowest level in nine months.
- 30-year mortgage rates decreased 5bps to 4.34%, the lowest level in five months.
Michael S. Erhardt, CPA
Senior Vice President, Investment Strategies
Vining Sparks IBG, LP