July 10, 2017
Activity improved mid-week in both the MBS and CMO sectors after the holiday and release of the Fed minutes on Wednesday. Yield spreads tightened a couple of basis points last week as Treasury yields moved higher in response to a sell-off in European sovereigns. MBS prepayments in June increased for the second month in a row and for the third time this year. Nominally, and percentage wise, these increases were very small. For additional prepayment commentary and charts, please see our June Prepayment Commentary.
- Mortgage yield spreads tightened last week:
- 15-year MBS yield spreads ended the week 2bps tighter to Treasuries and swaps
- 30-year MBS yield spreads ended the week 3 bps tighter Treasuries and swaps
- The Treasury curve has steepened 19bps over the last two weeks from 79 to 98bps between 2- and 10-year Treasuries.
- The Fed Minutes indicated there were a “range of views” on when to begin phasing out portfolio reinvestments. “Several” wanted to start “within a couple of months” while “some others” preferred to wait until later this year. “Several” also expect balance sheet normalization could result in slower rate hikes while “some other[s]” said there should be no impact on future rate hikes.
- Investors were active last week in moderately seasoned 20yr MBS, primarily in 3.5% coupons.
- Investors were also active in 10yr 2.5% MBS, which currently offer similar spreads to 15yr MBS, but have shorter average lives.
Trading activity in CMOs also improved mid-week driven primarily by extension swaps with investors selling shorter odd lot positions. The steeping of the curve over the last two weeks should be beneficial in increasing supply from new CMO production. Depositories were focused on stable structures with 4- to 6-year average lives. Full coupon front sequential structures off of 30yr 3.5% collateral (“3.5 squared”) remained popular with financial institutions with wider spreads and better supply than many shorter structures.
Rates and Refis
- Mortgage rates rose last week from the lowest levels this year.
- 15-year mortgage rates increased 5bps to 3.22%
- 30-year mortgage rates rose 8bps to 3.96%
- 15- and 30-year fixed mortgage rates have now fallen 33 and 36bps respectively year-to-date; however; mortgage rates are 48 and 55bps higher than this time last year.
- Mortgage applications edged higher in the week ended June 30 as increased purchase application activity offset slightly lower refinance apps. Total applications rose 1.4% as purchase inquiries grew by 3.1%, but refi apps fell 0.4%.
- The MBA Refi Index reveals that burnout dominates an unincentivized population of mortgage holders this year. After increasing for three consecutive weeks, the Index has declined the last two weeks to 1391. Refinance activity remains at historically low levels.
June Prepayment Speeds
MBS prepayments increased for the second month in a row and for the third time this year. Nominally, and percentage wise, these increases were very small. Slightly lower mortgage rates combined with seasonal increases in home sales caused the increase. The small size of the increase and the reversal of these mortgage rate declines during the last two weeks suggest most portfolio managers will find no need to make adjustments in response to June prepayment speeds. Calendar influences in July should push prepayment speeds slower, with 2 less application days than June. For additional prepayment commentary and charts, please see our June Prepayment Commentary.
Pending Home Sales Fall Short in May: Positive momentum from new and existing home sales reports failed to carry over into pending sales data. Pending sales of existing single-family homes fell unexpectedly in May and a negative revision to April’s result further widened the divide between the leading indicator for sales and actual sales activity. The 0.8% drop last month (exp. +1.0%) and a negative 0.4% revision (to -1.7%) for April bode poorly for actual existing sales in coming months. Contract signings were weaker in three of the four regions, while the level of pending transactions in the Midwest was unchanged.
Dan Stimpson, CPA
Senior Vice President