FRM Update

January 19, 2021

Fed Support   

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.

Trading Activity

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.

TBA-Eligible Securities:

Non-Deliverable Securities:

Specified 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 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

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