January 31, 2022
Current Yield Spreads
The major news last week was centered around the Fed meeting. Officials decided to keep rates unchanged and left the current tapering process in place (purchases should end in early March). However, the new Statement and Powell’s press conference revealed the Fed would use its tools to address the highest level of inflation seen in nearly 40 years, pointing to an interest-rate liftoff in March and opening the door to more frequent and potentially larger hikes. The Treasury market responded with a sell-off on the short-end of the curve as the 2-year Treasury increased 16 bps to a cycle high 1.16%. The 2/10’s sloped narrowed 15 bps to 60 bps, the flattest level since October 2020.
The mortgage passthrough market was unable to keep pace with Treasurys as yield spreads widened. Nominal yield spreads on 15-year MBS current coupon production widened 4 bps to 20 bps, while yield spreads on 30-year MBS to Treasuries with similar duration widened 5 bps to 66 bps.
The summary below reflects customer purchase activity from the previous week. Buyers continued to favor UMBS 20-year 2.0s and 2.5s. Activity was modest in 10- and 15-year passthroughs because spreads remain relatively tight. There was also activity in 15- and 30-year Jumbo 2.0s and 3.0s.
Mortgage Rates & Applications
Mortgage interest rates continued to climb higher last week and are now back to pre-pandemic levels. The 30-year rate increased 6 bps to 3.74% and the 15-year climbed 16 bps to 3.17%. The average 30-year mortgage rate was 3.71% in the last week of January 2020, before the pandemic. Mortgage applications fell 7.1% for the week ending January 21 as mortgage rates continued to depress refinance activity. Refi apps fell 12.6% for the week and are now down 56% from the beginning of last year. Purchase applications were down 1.8% from the previous week but are only down 11.5% from January 2021.
Michael S. Erhardt, CPA
Senior Vice President, Investment Strategies