January 27, 2020
Nominal yield spreads on MBS versus comparable Treasurys tightened last week, as 15-year contracted 4 bps to 55 bps and 30-year tightened 2 bp to 88. While yield spreads are off their highs from a few months ago because of strong demand, mortgage spreads are sitting at attractive levels and haven’t tightened as much as other sectors. This morning MBS spreads are under modest pressure (1 to 2 bps wider) with the strong Treasury rally.
The Treasury market rally has continued to stimulate strong two-way flow (buying and selling). Financial institutions remain active in 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 has been focused on 15- and 20-year passthroughs with lower dollar prices and coupons, as the spike in the refinance index remains a concern. Activity in 15-year pools was in seasoned 2.5s and newer-production 2.0s and 2.5s. 15-year 2.0s are trading well below par. The focus in 20-year pools was in 2.5s & 3.0s. 20-year 3.0s remain a common trade as these pools can be purchased at a smaller pay up to TBA compared to 2.5s.
There was also a resurgence of buying in non-TBA collateral such as jumbos (30-year 2.5s and 3.0s) 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 drifted lower for the week ending January 24, with 15-year falling 3 bps to 3.21% and 30-year declining 4 bps to 3.75%.
Mortgage applications for the week ending January 17 pulled back 1.2% on a 1.8% decline in refis and a 2.0% drop in purchases. The pullback came after two weeks of very solid gains. The four-week averages rose for both series: purchase apps are now at their highest average since 2009 while the refi average is 67% above its average level of activity from 2017 to 2018. Some volatility is to be expected for a period in the housing data given the unusually-warm December exacerbating the already-above-trend pace of activity.
Michael S. Erhardt, CPA
Senior Vice President, Investment Strategies
Vining Sparks IBG, LP