FRM Update

January 4, 2021

Fed Support   

The Fed’s aggregate mortgage buying last week totaled $20.0bn.  The most heavily purchased was 30-year UMBS 2.0s with a total volume of $9.8bn. The Federal Reserve will target up to $63.8bn MBS from Dec. 29 to Jan. 14, compared to the last cycle of $53.1bn. Gross purchases of MBS have reached $1.5tn during this round of QE.  The Fed owns approximately 28% of all agency MBS outstanding.

Current Yield Spreads

Yield spreads on current coupon MBS compared to Treasurys with similar duration were tighter last week on higher levels of buying at year-end.  Nominal spreads on 30-year MBS to Treasurys tightened 11 bps to 62 bps, while 15-year MBS tightened 7 bps to 30 bps.  Spreads tightened 30 bps during 2020 on record buying from the Fed and depositories.

Trading Activity

The summary below reflects trading activity from last week, which was led by UMBS 15-year 1.0s and specified pools with prepayment friction.

TBA-Eligible Securities:

Non-Deliverable Securities:

Specified Pools:

Given robust refinance activity,  portfolio managers continue to seek prepay protection to avoid potentially low or negative yields.  Many investors have turned to specified pools (lower loan balances, NY/FL collateral, investor loans) to help partially mitigate faster prepay speeds. The graph below highlights monthly prepayment speeds on different collateral types.

Prepay Friction – 30-Year 3.0s of 2019

Mortgage Rates and Refinance Activity

Mortgage rates finished the year at record lows according to the weekly Freddie Mac Survey. The 30-year fixed-rate mortgage was up 1 bp on the week to 2.67% but finished the year 105 bps lower than one year ago.  The 15-year mortgage rate inched lower by 2 bps on the week and fell 99 bps during the year. Freddie Mac reported survey-low mortgage rates 16 times during 2020.

The primary/secondary mortgage spread (average 30-year mortgage rate minus 30-year MBS current coupon) increased 5 bps last week to 1.50%. The spread has narrowed nearly 50 bps since the first week of August, which has allowed lower mortgage rates despite the back-up in Treasury yields over the same time period.

Michael S. Erhardt, CPA

Senior Vice President, Investment Strategies

Vining Sparks IBG, LP

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