January 19, 2021
The Federal Reserve’s aggregate mortgage buying last week totaled $28.3bn. The most heavily purchased securities were 30-year UMBS 2.0s and 1.5s with total volumes of $10.5bn and $6.1bn, respectively. The Fed will target up to $66.3bn of MBS from January 15 to January 29, compared to the last cycle of $63.8bn. Gross purchases of MBS have now surpassed $1.5tn during this round of QE.
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 relatively stable last week. Nominal spreads on 30-year MBS to Treasurys held firm at 75 bps, while 15-year MBS widened 1 bp to 37 bps. There was more volatility on higher coupons as spreads on 30-year 2.5s to 3.5s tightened 8 to 10 bps, despite the lack of Fed support.
The summary below reflects trading activity from the previous week. Activity was led by UMBS 20-year 1.5s for the second consecutive week. There was also solid activity in UMBS 30-year 1.5s as investors continued to steer towards lower premiums.
- UMBS 10-year 1.5s
- UMBS 15-year 1.0s to 3.0s (2.0s the most traded)
- UMBS 20-year 1.5s & 2.0s (1.5s the most traded)
- UMBS 30-year 1.5s to 2.5s (1.5s the most traded)
- FNMA 15-year Jumbos 3.5s
- FNMA 30-year Jumbos 1.5s to 3.5s (2.5s the most traded)
- 15- and 30-Year 1.5s to 3.0s 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 Applications
Mortgage applications rose 16.7% for the week ending January 8. Purchase applications rose 8.0% while refi applications surged 20.1%, the highest level since March 2020. Mortgage rates increased slightly according to the weekly Bankrate.com rate survey. Both the 15- and 30-year rates increased 2 bps to 2.37% and 2.89%, respectively.
The primary/secondary mortgage spread (average 30-year mortgage rate minus 30-year MBS current coupon) increased 5 bps last week to 1.44%. The spread has narrowed nearly 50 bps since the first week of August and 59 bps since hitting a high of 2.03% in early March. The spread remains elevated at 22 bps above the trailing 5-year average of 1.22%.
Michael S. Erhardt, CPA
Senior Vice President, Investment Strategies
Vining Sparks IBG, LP