January 28, 2019
Yield spreads on current production MBS to Treasuries widened 1 to 2 basis points on the week, with higher coupons underperforming modestly. Valuations remain relatively attractive for investors looking to deploy cash, as yield spreads remain on the upper-end of the trading range. Activity was good last week as financial institutions continue to favor the sector due to attractive yields, projected cash flow, and liquidity (particularly with TBA-eligible product).
The following represents a summary of the activity last week:
- The prominent trade continues to be in current production 15-year 4.0’s. Although spreads have contracted slightly, these pools are trading at approximately 80 basis points over the Treasury curve based on consensus prepayment speeds. Dollar prices have declined to slightly below $103.
- Lower coupon pools such as 15-year 2.5’s and 3.0’s have also been in demand and are generally being traded at par or less. These seasoned pools tend to have less negative convexity and exhibit better projected performance in a declining rate environment versus higher coupons.
- Other trades included 15-year 3.0’s collateralized by relocation loans. Generally, these pools tend to have prepayment speeds that are greater than the generic cohort across all interest rate scenarios.
- Investors continue to add single-issuer GNMA 4.5’s and 5.0’s. The pools are being 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.
- Other trades included several custom pools designed to help customers meet their Community Reinvestment Act (CRA) goals for 2019.
- The focus for FNMA DUS has generally been on 7- to 10-year finals. This has been a prevalent trade for investors seeking locked-out cash flows, positive convexity, and higher yields.
- Investors seeking Freddie K’s have been focusing on 3-year finals, which offer spreads of approximately 20 bps over the Treasury curve.
Mortgage Rates and Refinance Activity
- Benchmark mortgage rates increased modestly from the previous week.
- 15-year mortgage rates increased 1bps to 3.74%.
- 30-year mortgage rates increased 5bps to 4.42%.
Mortgage Applications Slow But Recent Trend Gives Optimism: Mortgage applications for the week ending January 18 fell 2.7% on a 2.2% drop in purchase apps and a 5.3% decline in refi apps. Despite the disappointing weekly tally, applications have been on the uptick lately, giving reason for some optimism about future sales. This optimism is particularly important after yesterday’s very disappointing existing home sales figures. Moreover, the disappointing December home sales data would have reflected homes that predominantly went under contract in October and November. Mortgage rates were at their peak at that time. According to Freddie Mac’s Mortgage market Survey, the 30-year mortgage rate peaked in early-November at 4.94% and has since fallen 50 basis points.
Michael S. Erhardt, CPA
Senior Vice President, Investment Strategies
Vining Sparks IBG, LP