July 16, 2018
MBS spreads remained stable to both Treasuries and Swaps this week. The yield curve continued its flattening trend with 2s/10s opening at 28bps and closing 3bps lower at 25bps, which is the lowest level since 2007.
The average rates on 30-year fixed and 15-year fixed mortgages remained relatively stable during the past week. Meanwhile, mortgage applications reversed course and increased 6.5% from one week earlier. Despite total applications rising, the refinance index decreased 4.0% from the week earlier with the index remaining below 1000. This is the lowest level of refinance activity since December 2000.
Activity picked up last week with investors focusing on the following:
- 10-Year 2.0s and 2.5s – Investors continue to favor 10-year MBS for the incremental spread and shorter cash flow structure, as rates have increased and the yield curve has flattened. However, supply is thin as the yield curve shape has dampened recent issuance. Valuations on 10-year 3.0s and 3.5s have tightened as a result of limited supply, while 2. 5s offer relative value given the quick prepayment speeds exhibited by 10-year collateral. For example, 2015 10-year 2.5s are paying approximately 13CPR over the past three months.
- 15-year 2.5s – The cheapening trend in this coupon along with the flattening yield curve have resulted in a relatively small pay up over TBA for pools with seasoning between 18 to 36 months. In some cases, investors can potentially receive less price volatility and greater stability of cash flows relative to new pools, for a modest trade-off in projected yield. Please see the latest Strategic Insight discussing the current merits of slightly seasoned, below par 15-year MBS.
- Seasoned 20-Year 3.0s – Several trades occurred with investors targeting seasoned pools (160-190 WAM). These structures offer similar characteristics to newer production 15-year pools.
- FNMA DUS and Freddie K’s – Trades last week reflected investors seeking both variable- rate and fixed-rate structures. Several trades were on the 7-year part of the curve, with investors seeking locked out cash flow and positive convexity. There was also demand for variable- rate FNMA ACES, with uncapped structure offering 32bps to 1-month LIBOR. Finally, in recent weeks several investors sold longer term Freddie K’s (9-10 years), taking advantage of the relatively tight spreads.
Mortgage Rates and Refinance Activity
- Mortgage rates remained relatively stable for the week ending 7/13.
- 15-year mortgage rates declined 1bp to 3.80%, 39bps above the 12-month average of 3.41%, and 9bps above the YTD average of 3.71%.
- 30-year mortgage rates remained at 4.37%, 30bps above the 12-month average of 4.07%, and 7bps above the YTD average.
- 15-year mortgage rates have increased 60bps in 2018, while 30-year mortgage rates are up 52bps YTD.
Mortgage Applications: Mortgage applications for the week ending July 6 rose 2.5% on a 6.5% gain in purchase apps and a 3.8% decline in refi apps. Mortgage rates have pulled back fractionally over the past two weeks with the 30-year mortgage rate falling from 4.39% to 4.37%. While this is hardly enough of a move to elicit an increase in mortgage activity, the strength in purchase activity remains apparent and points to a short-term bump of approximately 5% for home sales.
Michael S. Erhardt, CPA
Senior Vice President
Vining Sparks, IBG