FRM Update

January 7, 2019



Despite the fact that Treasury yields moved down slightly on a week over week basis, there was considerable intraweek volatility in the bond market. Yield spreads were relatively unstable as a result. The largest moves came later in the week. On Thursday there was a significant rally in the bond market. The 2-year yield dropped 8.9 bps to 2.38% while the 5-year yield fell 10.0 bps to 2.36%, both posting their biggest daily declines since May 2018.  We believe the fear of further declines in yields caused investors to become fairly active, as MBS activity ramped up in a meaningful way on Friday. The heightened demand sent yield spreads for current production 15-year MBS to Treasuries tighter by 3bps and 2bps tighter on 30-year MBS.  The increase in demand and subsequent tightening could also reflect the fact that Agency MBS tend to be a safe haven asset class among spread products, particularly compared to corporates.

Valuations are reasonably attractive as yield spreads remain on the upper-end of the trading range over the past year.  The Spread Snapshot table below puts this into perspective when you compare yield spread levels one year ago.

 



The following represents a summary of the activity last week:




Mortgage Rates and Refinance Activity



Housing:

Mortgage Apps Fall in Throw-Away Week: Mortgage applications for the week ending December 28 fell 8.5% on a 7.6% drop in purchase apps and a 10.6% drop in refis. While this marks the largest weekly decline in over a year, applications can be volatile around the holiday season.  In fact, applications around the Christmas week have dropped an average of 11.6% over the last five years. Particularly given the recent drop in mortgage rates, we are remiss to make much of this report.

 



Michael S. Erhardt, CPA

Senior Vice President, Investment Strategies

Vining Sparks IBG, LP

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