January 21, 2020
Nominal yield spreads on MBS versus comparable Treasuries were relatively stable last week, as both 15- and 30-year widened by 1 bp to 59 bps and 90 bps, respectively. While yield spreads are off their highs from a few months ago because of strong demand, mortgage valuations are still reasonably attractive compared to levels observed in recent years and to other sectors.
Activity was steady last week with decent two-way flow. Financial institutions remain active 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 passthroughs with lower-dollar prices and coupons. Activity in 15-year pools was centered around seasoned 2.5s and newer production 2.5s and 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 can be purchased at a smaller pay up to TBA compared to 2.5s. We also saw institutional buying in non-TBA collateral such as jumbos and reperforming loans. Certain reperforming collateral can offer compelling yields and better convexity in down rate scenarios. The reduction in potential optionality lines up well with financial institutions as most still have significant exposure to declining rate scenarios.
Mortgage Rates and Refinance Activity
Mortgage rates bounced higher for the week ending January 17, with 15-year increasing 2 bps to 3.24% and 30-year climbing 14 bps to 3.79%.
Mortgage applications for the week ending January 10 rose 30.2%, the largest weekly gain since the week ending January 9, 2015. The unusually-strong report appears to be, in part, the result of the seasonal volatility as the 2015 report was also preceded by several weeks of much softer-than-trend application data. Applications fell 22% in the final three weeks of December (2019) before rebounding 48% in the first two reports of 2020. In the current report, purchase applications rose 15.5% while refinance apps jumped 42.7%.
Michael S. Erhardt, CPA
Senior Vice President, Investment Strategies
Vining Sparks IBG, LP