February 3, 2020
Mortgages couldn’t keep pace with the strong Treasury market rally last week, as nominal spreads to comparable Treasurys for both 15- and 30-year widened 5 bps to 60 bps and 93 bps, respectively. The benchmark 10-year Treasury dipped under 1.60% for the first time since last October, which sent 30-year mortgage rates down to 3.63%. 30-year 3.5s and higher coupons are now well in the money to refinance.
The refinance index climbed higher to over 2,500 for the week ending January 24. This is the third print in a row above 2,400 after a large end-of-year dip to 1,375. The average refi index during January is now the highest monthly level since August. March prepayments will likely accelerate, although the seasonal impact from lower purchases should help partially mitigate the increase in speeds.
The Treasury market rally during January stimulated 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.
Last week, buying was primarily focused on 15- and 20-year passthroughs with lower dollar prices, as the increase in the refinance index remains a concern. Activity in 15-year pools was generally in newer production 2.0s and 2.5s. 15-year 2.0s are trading below par. The focus in 20-year pools was on 2.5s & 3.0s. 20-year 3.0s remain a popular trade as these pools can be purchased at a smaller pay up to TBA compared to 2.5s. Finally, there was steady buying in non-TBA collateral such as jumbos (15-year 2.5s, 30-year 2.5s and 3.0s).
Mortgage Rates and Refinance Activity
Mortgage rates continued to decline last week, with 15-year falling 7 bps to 3.14% and 30-year declining 12 bps to 3.63%. Mortgage applications for the week ending January 24 rose 7.2% on a 5.3% increase in purchase apps and a 7.5% jump in refi apps. After some December figures, applications have jumped in January. The 4-week moving average for purchase apps is now at its highest level since early-2009 while the moving average for refi apps is up 75% from year-ago levels.
Michael S. Erhardt, CPA
Senior Vice President, Investment Strategies
Vining Sparks IBG, LP