January 29, 2018
Mortgage related security yields increased last week continuing the trend higher this year, as treasury yields and mortgage rates have pushed higher. Mortgage yield spreads versus Treasuries widened last week as 30yr Treasury yields versus 30yr MBS moved slightly higher and are currently in the upper end of the trading range so far for 2018. This increase in MBS yields drove 30-year mortgage rates 4bps higher last week and 25bps higher this year. The MBA Refi Index increased for a third consecutive week, rising 0.9% to 1326, but remains slightly below its 12-month average of 1344. Refinance activity continues to be historically low and range-bound. New and existing homes sales slowed in December, but sales in the fourth quarter were the strongest quarter of last year.
- Mortgage yield spreads widened last week:
- 15-year MBS yield spreads ended the week 1 to 3 bps wider to Treasuries and swaps.
- 30-year MBS yield spreads ended the week 1 to 4bps wider to Treasuries and swaps.
- Curve slope measured by 2- and 10-year Treasuries flattened 5bps last week from 59 to 54bps, reversing the 5bps of steepening the prior week; however, in early morning trading, the curve has steepened to 57bps.
- Investors were active in seasoned 30yr MBS, primarily in 3.5% coupons in HLTV collateral, which offer attractive yields and spreads in the sector.
- Investors were also active in seasoned 20yr MBS, primarily in 3% and 3.5% coupons and in 15yr MBS, with coupons ranging from 2% to 3.5%.
- A combination of higher yield versus agency bullets and deference to convexity inspired activity in seasoned 5yr multi-family FNMA DUS and Freddie K’s.
- Investors also remain active in uncapped floating rate multi-family bonds, taking advantage of higher yield opportunities in LIBOR rates and attractive floating rate yields.
CMO yields have increased and for typical bank-type structures range from 2.75% to 3.00% or higher, while CMO yield spreads tightened a basis point in various types of structures last week. Investor activity is focused on structures that offer 3% yields and weighted average lives around five years.
Mortgage Rates and Refinance Activity
- Mortgage rates rose again last week, continuing a trend higher in 2018.
- 15-year mortgage rates rose 3bps to 3.46%, 35bps above the 12-month average of 3.11%.
- 30-year mortgage rates rose 4bps to 4.10%, 22bp above the 12-month average of 3.88%.
- 15-year mortgage rates have risen 26bps in 2018, while 30-year mortgage rates are up 25bps YTD.
- Mortgage applications for the week ending January 19 rose 4.5% as purchase apps rose 6.1% and refi apps rose 0.9%. On a 4w/4w basis, purchase apps are rebounding from their 2H18 drop but refi apps remain very low.
- The MBA Refi Index increased for the third consecutive week, rising 0.9% to 1326, but remains slightly below its 12-month average of 1344. Refinance activity continues to be historically low and range-bound. The Index reached its prior year high the week ending September 8th at 1637; however, the Refi Index ended 2017 falling twelve of the last sixteen weeks.
New and Existing Homes Sales Slowed More than Expected in December and November Revised Lower; Q4 Still the Strongest Quarter in 2017
- Existing Home Sales: The pullback in existing home sales in December was larger than expected and November’s gain was revised lower, but remained the fastest pace for sales since February 2007. The 3.6% MoM decline in December was driven by weaker activity across all four regions. Although the median price dipped in December, prices remained 5.8% higher than a year ago. While steady demand continues to support prices, supply forces are also contributing to the continued appreciation. Inventory of existing homes fell to 1.48MM units, which is enough to cover just 3.2 months of sales.
- New Home Sales: Total sales for December, which were expected to fall 7.9% MoM, dropped 9.3% and November’s 17.5% surge was reduced to 15.0%; however, November’s annualized pace of 689k remains the strongest of the cycle. Also similar to the activity in existing home sales, the weakness was broad based with declines in all four regions. Supply ticked up to 5.7 months and back towards the high end of the range since 2014. The median price inched higher to $335.4k, a new record high, up 2.6% YOY, and sales are 14.1% higher than a year ago.
Dan Stimpson, CPA
Senior Vice President