FRM Update

January 3, 2022



Current Yield Spreads The mortgage passthrough market rallied meaningfully during the final two trading weeks of 2021 and added even more gains to its year-to-date tally versus the broader Treasury market. During the past two weeks, nominal yield spreads on 15-year MBS tightened 7 bps to 13 bps, while yield spreads on 30-year MBS to Treasurys with similar duration tightened 9 bps to 55 bps. 15-year MBS performed particularly well during 2021, as yield spreads contracted by more than half, from 30 bps to 13 bps.

Trading Activity The summary below reflects customer purchase activity from the previous week. Activity was slower during the last two holiday-shortened trading weeks, but we saw depositories continue to gravitate toward 20-year 1.5s and 2.0s as valuations remain lofty for 10- and 15-year passthroughs. TBA-Eligible Securities:

Non-Deliverable Securities: Specified Pools:
Mortgage Rates and Applications Bankrate’s most recent survey shows that mortgage rates have been relatively stable over the past couple of weeks and remain historically low. The 30-year rate finished 2021 at 3.27%, increasing 40 bps year-over-year.  The 15-year rate closed 2021 at 2.54%, which was an increase of 20 bps from the previous year.  Low interest rates fueled record borrowing during 2021.  According to the Mortgage Bankers Association (MBA), mortgage lenders issued $1.61 trillion in purchase loans during 2021, which is up from $1.48 trillion in 2020, and above the previous record of $1.51 trillion in 2005. The last update from the MBA on weekly mortgage applications was from 12/17 due to the holiday season. Mortgage applications declined slightly for the week ending 12/17, driven by a 3% decline in purchase applications. The refinance index increased 2% from the previous week and was 42% lower than the same week one year ago.

Michael S. Erhardt, CPA

Senior Vice President, Investment Strategies

Vining Sparks

Current Yield Spreads Last week the FOMC announced plans to double the pace of reduction of its monthly asset purchases from $15bn to $30bn (beginning in January) and signaled they favor raising interest rates in 2022 at a quicker pace. The Fed is leaning towards three rate hikes next year according to their Summary of Economic Projections with liftoff likely coming sometime after the tapering process concludes in March. The broader Treasury market responded to the Fed update and uncertainty around the Omicron variant with a rally in longer rates (10-year down 7 bps for the week) while the MBS market gave back some of the gains versus Treasurys from the previous week. Nominal yield spreads on 15-year MBS widened 4 bps to 20 bps, while spreads on 30-year MBS to Treasurys with similar duration widened 6 bps to 64 bps. Yield spreads on 30-year MBS are now at an eleven-week high and have increased 12 bps in the last month.

Trading Activity The summary below reflects customer purchase activity from the previous week. Activity continued to be led by UMBS 20-year 2.0s. Rich valuations on 10- and 15-year passthroughs continue to push investors to longer finals with higher spreads. There’s also been consistent two-way flow as depositories are actively repositioning (selling underperforming positions) to improve earnings in future periods. TBA-Eligible Securities: Non-Deliverable Securities: Specified Pools:
Mortgage Rates and Applications Bankrate’s most recent survey shows mortgage rates were stable last week and remain historically low. Both 15- and 30-year rates decreased by 1 bp to 2.52% and 3.24%, respectively. Mortgage applications for the week ending December 10 fell 4.0% on a 6.4% decrease in refi apps and a 0.7% increase in purchase apps. Refi apps are now down 48% from January’s average.  Purchase apps, which were down 27% through July, are now down just 12% from January.

Michael S. Erhardt, CPA

Senior Vice President, Investment Strategies

Vining Sparks

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