July 20, 2020
The Fed’s aggregate mortgage buying last week was $22.9bn. The most heavily-purchased was the UMBS 30-year 2.50% for August settle. Since March 16, 2020 the Fed has purchased over $820bn of agency MBS as part of its QE4 program. At the June FOMC meeting officials stated the Fed will purchase a minimum of $40bn per month until financial conditions improve.
The historic level of Fed support has significantly increased pricing and reduced spread volatility in the sector. Nominal 30-year mortgage spreads to Treasurys touched a stressed level of almost 150 bps. Within a week of announcing the Fed’s intention to purchase up to $50bn per day of agency MBS, spreads came in to 75 bps. In terms of pricing, the UMBS 30-year 2.0%, 2.5%, and 3.0% have risen 5.0, 3.5, and 3.5 points, respectively, since mid-March.
Current Yield Spreads
Nominal spreads for production MBS to Treasurys were slightly wider on a week-over-week basis. 15-year widened 3 bps to 60 bps and 30-year widened 2 bps to 92 bps. Nominal spreads are wider on a year-over-year basis by 7 to 8 basis points. Z-spreads have recovered from their recent lows.
Financial institutions continue to be active investors as cash and deposits have piled up at an unprecedented pace and pressure to put them to work is building. Earning just 5 to 10 bps on excess cash/reserves is punitive to current earnings. There is also some concern that yield spreads may begin to tighten as supply is challenged thanks to the Fed.
Over the past few months, new-purchase activity has been focused on what the Fed isn’t buying (non-deliverable MBS securities), as these products generally offer wider spreads vs TBA-eligible securities with rich valuations. However, in recent weeks there’s been an uptick in buying of deliverable securities, as the pay-up for enhanced liquidity has narrowed meaningfully.
Prepayment concerns and lack of supply are the challenging factors for MBS investors. Buyers have focused on lower coupons and pools with characteristics that make prepayments less likely (low loan balances, 100% NY, low FICOs).
Last week activity included the following:
- GNMA Jumbos (MJM 2.5s to 3.5s)
- FNMA Jumbos (FNCK 2.0s to 3.0s)
- UMBS 15-year 1.5s to 3.0s
- UMBS 20-year 2.0s and 3.0s
- UMBS 30-year 2.0s and 3.5s (most volume of any sector)
- 15- and 30-year 2.5% LLB Pools ($150k max loan size)
- Custom CRA Pools
Mortgage Rates and Refinance Activity
Mortgage rates hit another record low last week. Freddie Mac reported that the 30-year fixed-rate mortgage in its survey ending July 16 fell to 2.98%, the lowest rate in the survey’s history. The 15-year rate was relatively stable and finished at 2.58%, the lowest since May of 2013.
Mortgage applications for the week ending July 10 rose 5.10% as mortgage rates fell to new, record lows pushing refi apps up 11.9%. Applications for refinance are now up 117% from their 2019 average. Purchase apps, however, fell 6.1% during the reference week but remained 18% above their 2019-average level.
Lenders have the primary/secondary spread at 1.69%, which is 40 bps above the trailing one-year average of 1.29%, in order to manage demand and staffing resources. If the primary/secondary spread reverts to the 5-year average, we could see 30-year mortgage rates in the 2.50% to 2.75% range, which would obviously have an impact to already-elevated levels of refi activity.
Michael S. Erhardt, CPA
Senior Vice President, Investment Strategies
Vining Sparks IBG, LP