July 15, 2019
Current-production coupon MBS widened last week with the 15-year wider by 4 bps to 51 bps and the 30-year wider 4 bps to 74 bps. On a nominal basis, mortgage spreads have remained relatively unchanged on the year, as most other sectors have tightened.
The following is a list of actively traded sectors and coupons:
- 15-Year 2.5s – With 2.0s being relatively difficult to find, buying has picked up in 2.5s in recent weeks, as the pay-ups over TBA remain reasonable.
- 15-Year 3.0s & 3.5s – With prices well above par for these coupons, investors have targeted seasoned pools to help mitigate prepayment exposure.
- 20-Year 3.0s and 3.5s – Newer-production 20-year pools offer higher projected yields, and tend to perform relatively well in stable to rising interest rate scenarios.
- 30-Year 3.0s and 3.5s – These pools have been relatively immune to call risk, unlike the premium coupons.
- Off-The-Run-Collateral – Buyers seeking higher yields (to TBA) have focused on newer-production 30-year pools collateralized by jumbo loans and other pools consisting of relocation loans.
- CMBS – The focus for CMBS (Fannie DUS & Freddie Ks) has generally been on pools with finals in the 5- to 7-year range. This has been a prevalent trade for investors seeking locked-out cash flow, positive convexity, and higher yields.
Mortgage Rates and Refinance Activity
Benchmark mortgage rates were relatively stable last week. 15-year mortgage rates ticked up 1 bp to 3.23%, while 30-year mortgage rates decreased 3 bps to 3.80%.
Mortgage applications declined last week, but the positive trend remains. Mortgage applications for the week ending July 5 fell 2.4% on a 2.3% increase in purchase apps and a 6.5% decline in refi apps. Purchase applications have slowly been grinding higher, up 11% on a monthly average basis versus year-ago levels. Despite the weekly decline in refi apps, the 4-week moving average is now up 134% from activity in November.
Michael S. Erhardt, CPA
Senior Vice President, Investment Strategies
Vining Sparks IBG, LP