January 11, 2021
The Fed’s aggregate mortgage buying last week totaled $28.8bn. The most heavily purchased securities were 30-year UMBS 2.0s and 2.5s with total volumes of $13.9bn and $4.3bn, respectively. The Federal Reserve will target up to $63.8bn MBS from Dec. 29 to Jan. 14, compared to the last cycle of $53.1bn. Gross purchases of MBS have reached $1.5tn during this round of QE. The Fed owns approximately 28% of all agency MBS outstanding.
Current Yield Spreads
Yield spreads on current coupon MBS (15-year 1.5s and 30-year 2.0s) compared to Treasurys with similar duration were wider last week as the 10-year Treasury yield increased 20 bps. Nominal spreads on 30-year MBS to Treasurys widened 13 bps to 75 bps, while 15-year MBS widened 6 bps to 36 bps.
The summary below reflects trading activity from last week, which was led by UMBS 20-year 1.5s and specified pools with prepayment friction.
- UMBS 10-year 2.0s
- UMBS 15-year 1.0s to 3.5s (2.0s the most traded)
- UMBS 20-year 1.5s to 2.5s (1.5s the most traded)
- UMBS 30-year 1.5s & 2.5s (1.5s the most traded)
- FNMA 15-year Jumbos 1.5s
- FNMA 30-year Jumbos 1.5s & 2.5s (2.0s the most traded)
- 15- and 30-Year 1.5s to 3.0’s LLB Pools ($85k -$200k max loan size) and NY/FL collateral
- Custom CRA 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 Refinance Activity
Mortgage rates were relatively stable last week and remain at historically low levels, according to the weekly Bankrate.com rate survey. The 30-year fixed-rate mortgage held firm at 2.87%, while the 15-year mortgage increased 1 bp to 2.35%.
January prepayment speeds, reflecting activity in December, were released last week. After slowing down in November, prepayment speeds were higher across the board. In aggregate, FNMA 30-year speeds increased 6% compared to the November decrease of 11%. Ginnie Mae II 30-year aggregate speeds increased 11%. Please see here for our complete commentary on prepayment speeds.
The primary/secondary mortgage spread (average 30-year mortgage rate minus 30-year MBS current coupon) decreased 11 bps last week to 1.39%. The spread has narrowed nearly 50 bps since the first week of August and 64 bps since hitting a high of 2.03% in early March. The spread remains elevated at 17 bps above the trailing 5-year average of 1.22%. This may allow for lower mortgage rates even with a continued back-up in Treasury yields.
Michael S. Erhardt, CPA
Senior Vice President, Investment Strategies
Vining Sparks IBG, LP