January 14, 2019
Yield spreads on current-coupon production compared to Treasuries were largely unchanged on a week-over-week basis. Valuations remain attractive for buyers based on the spread widening that occurred during much of 2018. Performance has been strong over the past month, with MBS outperforming most of the other fixed-income sectors.
Investors were extremely active last week with most of the buying concentrated in the 30-year sector. Within that space there was buying of CRA paper, current-coupon production, HLTV loans, jumbo collateral, and single-issuer GNMA pools. In the 15-year sector, the primary purchases were in current production 4.0’s and seasoned 2.5’s. There was also some demand for seasoned 20-year 3.0’s and newer production 20-year 4.0’s.
The following represents a summary of the activity last week:
- 15-Year – The most active trade during the past three weeks has been in current-production FHLMC 15-year 4.0’s. The higher coupons have experienced more widening in recent weeks because of interest rates declining and premium aversion. We have seen these pools trade at 80 to 90 bps over the Treasury curve based on consensus prepayment speeds. Dollar prices remain in the $103 range. Demand has been so strong that inventories are largely depleted. Investors have targeted FHLMC paper in lieu of FNMA, because the FNMA majors have contained a larger concentration in Quicken production.
- As 15-year 3.0’s have increased in price to nearly par, investors have shifted some demand to lower coupons (seasoned 2.0’s and 2.5’s). These pools tend to have less negative convexity and exhibit better projected performance in a declining rate environment versus higher coupons.
- 30-Year – This was the most active sector for the second consecutive week. The most popular trade was a new single-issuer GNMA II 5.0% pool. This was a pool issued by one of the originators that was recently restricted by Ginnie Mae from participating in the multi-issuer pools. The obvious appeal of this pool was the price and yield spread available. The projected yield of 3.88% and relatively short average life of 3.9 years based on consensus speeds compares favorably to the multi-issuer pools.
- Another trade that resonated well among financial institutions was in seasoned 30-year 3.0’s trading in the $98 range.
- FNMA DUS and Freddie K’s – The focus for FNMA DUS was on 10-year finals. This has been a popular trade for investors seeking locked-out cash flows, positive convexity, and higher yields (3.4% to 3.5%).
- Investors seeking Freddie K’s have purchased 3- to 4-year finals. There has also been decent demand for floating rate structures (FNMA Aces and Freddie K’s in which the fixed-rate cash flow has been swapped out for floating-rate cash flow).
Mortgage Rates and Refinance Activity
- Benchmark mortgage rates were mixed last week.
- 15-year mortgage rates increased 7bps to 3.75%, the lowest level since August 2018.
- 30-year mortgage rates decreased 6bps to 4.43%, the lowest level since September 2018.
- Both 15-year and 30-year mortgage rates have decreased approximately 38bps since the beginning of November 2018.
Mortgage Apps: Lower interest rates sent mortgage applications surging higher last week. Total applications surged 23.5% week-to-week to their highest levels since July 2018. The volume of refinance loan applications increased reflecting the highest level since February 2018 at 45.8% of total applications. The refinance share of mortgages was at 42.7% the previous week. The Refinance Index skyrocketed 35.0% from the prior week and the unadjusted Purchase Index climbed 59.0% from a week ago but was only 4% higher than the same week in 2018. The seasonally adjusted Purchase Index also significantly increased, rising 17% from the week before.
Michael S. Erhardt, CPA
Senior Vice President, Investment Strategies
Vining Sparks IBG, LP