FRM Update

February 8, 2021

Fed Support   

The Federal Reserve’s aggregate mortgage buying last week totaled $32.4bn, which was near the total of $36.0bn for the previous week.  The most heavily purchased securities were 30-year UMBS 2.0s and 1.5s with total volumes of $16.3bn and $4.5bn, respectively. The Federal Reserve is targeting up to $59.7bn of MBS from February 1 to February 11.

Current Yield Spreads

Yield spreads on current-coupon MBS (15-year 1.5s and 30-year 2.0s) compared to Treasurys with similar duration widened last week. Nominal spreads on 15-year MBS to Treasurys widened 1 bp to 42 bps and 30-year MBS widened 4 bps to 80 bps.

Trading Activity

The summary below reflects purchase activity from the previous week.  Purchase activity was led by UMBS 20-year 1.5s and 2.0s, followed by UMBS 30-year 1.5s.  There was also strong two-way flow with investors selling seasoned higher-coupon TBA-deliverable pools. TBA pricing is advantageous as many of these pools have negative yields to the buyer using recent prepayment speeds. Reinvestment seems to be centered on pools with lower coupons and prepayment friction stories.

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

The survey shows that mortgage rates remain near record lows and were relatively stable last week, despite the bond market sell-off. The 15-year mortgage rate remained at 2.35% and the 30-year rate declined 3 bps to 2.85%.

Mortgage applications increased 8.15% for the week ending January 29, breaking a two-week streak of decreases. The seasonally adjusted purchase index increased 0.1% from one week earlier while the refinance index increased 11.4%, its highest level since March 2020.  According to some estimates, nearly 80% of the conventional market has a refinance incentive of at least 50 bps with sub 3.00% 30-year mortgage rate.

The January prepayment report was released last week. Fannie 30-year speeds declined 12% from December, which was roughly in line with expectations. Ginnie Mae II 30-year speeds declined nearly the same amount as conventionals, falling 11% from the previous month.  The declines were largely due to fewer collection days in January compared to December. Please see here for our complete prepayment commentary.

The primary/secondary mortgage spread (average 30-year mortgage rate minus 30-year MBS current coupon) decreased 5 bps last week to 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 mortgage rates.

Michael S. Erhardt, CPA

Senior Vice President, Investment Strategies

Vining Sparks IBG, LP

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