January 25, 2021
The Federal Reserve’s aggregate mortgage buying last week totaled $23.9bn. The most heavily purchased securities were 30-year UMBS 2.0s and 1.5’s with total volumes of $11.4bn and $3.8bn, 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 wider last week. Nominal spreads on 30-year MBS to Treasurys increased 2 bps to 77 bps, while 15-year MBS widened 5 bps to 42 bps. Interestingly, the spread on 30-year 2.5’s has tightened approximately 20 bps over the past two weeks, despite the lack of Fed support for this coupon. The trend highlights the unrelenting demand for MBS from investors.
The summary below reflects trading activity from the previous week. Activity was led by UMBS 25-year 1.5s. There was also strong demand in UMBS 20-year 1.5s as investors continue to target lower premiums for prepayment protection.
- UMBS 15-year 1.0s to 2.0s (2.0s the most traded)
- UMBS 20-year 1.5s to 2.5s (1.5s the most traded)
- UMBS 25-year 1.5s
- UMBS 30-year 1.5s to 2.5s (1.5s the most traded)
- FNMA 30-year Jumbos 1.5s
- 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 refinance applications decreased 4.7% for the week ending January 15, following the previous week’s large increase of 20.1%. The purchase index increased 2.7%, up for a second week in a row. The refi applications index is 73% higher compared to the same time last year. Mortgage rates decreased slightly according to the weekly Bankrate.com rate survey. Both the 15- and 30-year rates fell 1 bp to 2.36% and 2.88%, respectively.
The primary/secondary mortgage spread (average 30-year mortgage rate minus 30-year MBS current coupon) increased 4 bps last week to 1.48%. The spread has narrowed 48 bps since the first week of August and 55 bps since hitting a high of 2.03% in early March, as the mortgage industry has added headcount and increased capacity. The spread remains elevated at 26 bps above the trailing 5-year average of 1.22%.
Michael S. Erhardt, CPA
Senior Vice President, Investment Strategies
Vining Sparks IBG, LP