FRM Update

January 10, 2022



Current Yield Spreads

Treasury yields experienced the largest weekly increase in yields since October 2019 last week as investors weighed the release of the Fed’s somewhat hawkish meeting minutes and a December payroll report that pointed to an ever-growing tight labor market. The Fed’s December minutes showed officials generally believed balance sheet runoff will begin closer to liftoff of the fed funds rate than in the last cycle (22 months between the two events then) and could occur at a faster pace, considering the economic outlook is stronger, inflation is higher, the labor market is tighter, and the balance sheet is larger. Officials said rate hikes could occur “sooner or at a faster pace” than expected in November, consistent with the upshift in December’s dots. 

Yields hit cycle highs as the 2-year Treasury yield climbed 13 bps to 0.87% and the 10-year Treasury increased 25 bps to 1.76%.  The mortgage passthrough market was under pressure but current coupons only modestly underperformed on the week. Nominal yield spreads on 15-year MBS were stable at 13 bps, while yield spreads on 30-year MBS to Treasurys with similar duration widened 2 bps to 57 bps. Higher coupons experienced the most underperformance to Treasurys. 



Trading Activity

The summary below reflects customer purchase activity from the previous week. Investors returned in force last week as the broader Treasury market sold off and MBS yield spreads widened a touch.  The most popular trade was 20-year 2.0’s by a considerable margin, while there was healthy activity in 30-year 2.0’s and 2.5’s.  Activity continues to be light in 10- and 15-year passthroughs as valuations remain high.



Non-Deliverable Securities:

Specified Pools:


Mortgage Rates and Applications

Bankrate’s most recent survey shows that mortgage rates were on the rise last week as lenders adjusted to a sharp increase in Treasury yields. The 30-year rate increased 17 bps to 3.44% and the 15-year rose 15 bps to 2.69%.  Although interest rates remain historically low, the 30-year has risen 57 bps during the past year and is currently at the highest level seen since June 2020. The Mortgage Bankers Association reported that the mortgage applications index fell 5.6% for the week ending 12/31, after rising 3.2% in prior week. Purchase applications were down 10.2% after rising 7.4% in the prior week. Refinancing applications declined 2.5% following a rise of 0.4% in the prior week.  Refinancing applications are down 40% from one year ago.



Michael S. Erhardt, CPA

Senior Vice President, Investment Strategies

Vining Sparks

Current Yield Spreads Last week the FOMC announced plans to double the pace of reduction of its monthly asset purchases from $15bn to $30bn (beginning in January) and signaled they favor raising interest rates in 2022 at a quicker pace. The Fed is leaning towards three rate hikes next year according to their Summary of Economic Projections with liftoff likely coming sometime after the tapering process concludes in March. The broader Treasury market responded to the Fed update and uncertainty around the Omicron variant with a rally in longer rates (10-year down 7 bps for the week) while the MBS market gave back some of the gains versus Treasurys from the previous week. Nominal yield spreads on 15-year MBS widened 4 bps to 20 bps, while spreads on 30-year MBS to Treasurys with similar duration widened 6 bps to 64 bps. Yield spreads on 30-year MBS are now at an eleven-week high and have increased 12 bps in the last month.

Trading Activity The summary below reflects customer purchase activity from the previous week. Activity continued to be led by UMBS 20-year 2.0s. Rich valuations on 10- and 15-year passthroughs continue to push investors to longer finals with higher spreads. There’s also been consistent two-way flow as depositories are actively repositioning (selling underperforming positions) to improve earnings in future periods. TBA-Eligible Securities:

Non-Deliverable Securities: Specified Pools:
Mortgage Rates and Applications Bankrate’s most recent survey shows mortgage rates were stable last week and remain historically low. Both 15- and 30-year rates decreased by 1 bp to 2.52% and 3.24%, respectively. Mortgage applications for the week ending December 10 fell 4.0% on a 6.4% decrease in refi apps and a 0.7% increase in purchase apps. Refi apps are now down 48% from January’s average.  Purchase apps, which were down 27% through July, are now down just 12% from January.

Michael S. Erhardt, CPA

Senior Vice President, Investment Strategies

Vining Sparks

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