FRM Update

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.

 

MBS





CMOs

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



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.



Housing

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

Vining Sparks

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