January 22, 2019
A risk-on environment sent yields higher for the second consecutive week, as Treasury yields increased 7 to 10 basis points across the curve. The resulting lower dollar prices provided a catalyst for MBS activity as investors took advantage of the highest yields available this year. The demand caused yield spreads on current production MBS to Treasuries to tighten 3 to 4 basis points on the week. Valuations remain relatively attractive for buyers based on the basis widening that occurred during much of 2018.
Activity was primarily focused in the 15- and 30-year sectors. In the 15-year space, investors added both seasoned and new production pools, with coupons ranging from 2.00% to 4.00%. The activity in the 30-year sector was centered on new production GNMA single-issuer pools with 4.50% and 5.00% coupons.
The following represents a summary of the activity last week:
- Financial institutions continue to focus on these defensive pools for near-term cash flows. However, supply in the secondary market is relatively thin, especially for seasoned pools. We have seen sporadic activity in 10-year 2.0’s trading at a discount.
- The prominent trade continues to be in current production 15-year 4.0’s. The higher coupons have experienced more widening versus the lower coupons in recent weeks. We have seen these pools trade at 80 to 90 basis points over the Treasury curve based on consensus prepayment speeds. Dollar prices have declined to slightly below $103. FHLMC paper is becoming difficult to source, but there’s a decent amount of FNMA pools available in the secondary market.
- 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. Adding pools with less negative convexity continues to be a theme with financial institutions.
- This was the most active sector for the third consecutive week. The most popular trades were in new single-issuer GNMA 4.0’s and 5.0’s. The pools were issued by an originator that was recently restricted by Ginnie Mae from participating in the multi-issuer pools. The pools are trading at 100+ basis points over the Treasury curve based on consensus prepayment speeds.
- Several other trades that resonated well among financial institutions were in seasoned 30-year 3.0’s trading in the $98 range and 30-year 4.0’s backed by jumbo loans.
- The focus for FNMA DUS was on 10- to 11-year finals. This has been a prevalent trade for investors seeking locked-out cash flows, positive convexity, and higher yields (3.30% to 3.50%).
- Investors seeking Freddie K’s have purchased 4- to 5-year finals. There has also been 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). These uncapped structures can offer current yields of approximately 3.00% with modest premium exposure (~$100.4).
Mortgage Rates and Refinance Activity
- Benchmark mortgage rates were mixed last week.
- 15-year mortgage rates decreased 2bps to 3.73%, the lowest level since August 2018.
- 30-year mortgage rates increased 5bps to 4.48%, the lowest level since September 2018.
Mortgage Apps: Mortgage applications for the week ending January 11 rose 13.5%, rising 40% over a two-week span after the previous week’s 23.5% increase. Over the two-week span, purchase apps have risen 27% while refi apps have jumped 61%. According to the MBA data, the average 30-year mortgage rate dropped to 4.74% during both observation periods, down from a peak of 5.17% in November. While two weeks does not make a trend, the positive results improve the short-term outlook for housing activity.
Michael S. Erhardt, CPA
Senior Vice President, Investment Strategies
Vining Sparks IBG, LP