January 13, 2020
Strong investor demand propelled nominal yield spreads tighter on MBS versus comparable Treasurys last week, as 15-year tightened 5 bps to 58 bps and 30-year tightened by 5 bps to 89 bps.
The mortgage-backed securities market had its best annual performance in more than a decade last year and investors have increasingly turned to this market for yield in recent months. Current demand is so strong that a BlackRock Inc. exchange-traded fund (ticker MBB) filled with MBS had its biggest inflow on record last week, after taking in nearly $650 million on Wednesday. Mortgage-related mutual funds have been raking in the cash as well, with net inflows totaling $480 million for the weekly period ending January 8, according to Refinitiv Lipper. That’s the biggest weekly inflow since August.
While yield spreads are off their highs from August due to strong demand, mortgage valuations are still reasonably attractive compared to levels observed in recent years.
Activity picked up last week with a healthy amount of two-way flow. Financial institutions were busy investing excess cash, repositioning, 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.
Buying was focused on 15- and 20-year pass-throughs with lower coupons. Activity in 15-year pools was centered around newer-production 2.0s to 3.0s, while the focus in 20-year pools was in 2.5s & 3.0s. 20-year 3.0s were the most common trade as these pools offer attractive yields with slightly less price risk compared to 2.5s.
Prepayment speeds were released last week and overall they were quite stable compared to the previous month. Fannie and Freddie came in as expected while certain Ginnie vintages were higher than consensus. Our complete prepayment commentary can be found here.
Mortgage Rates and Refinance Activity
Mortgage rates drifted lower for the week ending January 10, with 15-year declining 6 bps to 3.22% and 30-year falling 9 bps to 3.65%. Rates have now fallen to the lowest level since October, which has given mortgage applications new life. After three weeks of declining mortgage applications, new apps jumped 13.5% according to the MBA report for the week ending January 3. The increase included a 3.0% gain in purchase apps and a 24.6% jump in refi apps. Going forward, housing activity continues to strengthen but remains contingent on rates remaining low.
Michael S. Erhardt, CPA
Senior Vice President, Investment Strategies
Vining Sparks IBG, LP