July 22, 2019
Current-production coupon MBS were relatively stable last week with the 15-year wider by 1 bp to 52 bps and the 30-year tighter 1 bp to 73 bps. Mortgage spreads remain relatively wide versus historical levels and other sectors.
As mortgage rates are holding near their lowest levels in two and half years, investors remain focused on seasoned pools and lower coupons. Activity over the past few weeks has been centered in 15- and 20-year MBS with a modicum of trades in longer 30-year pools and off-the-run collateral.
The following is a list of actively traded sectors and coupons:
- Seasoned 15-Year 2.0s – 2.0s remain the only coupon trading under par and are generally hard to source.
- 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 – Investors have targeted both new and seasoned pools.
- 20-Year 3.0’s and 3.5’s – 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 – Limited buying in longer-duration paper has been focused on lower 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 K’s) 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 held firm at 3.23%, while 30-year mortgage rates increased 4 bps to 3.84%.
Mortgage applications dropped on fewer purchase inquiries last week. Refinancing activity recovered 1.5% last week from the prior week’s 6.5% drop, but overall applications fell 1.1% on weaker purchase activity. Purchase applications cooled 3.8% as the 30-year mortgage rate estimate edged up to a four-week high, but remains a full percentage point below last November’s peak.
Michael S. Erhardt, CPA
Senior Vice President, Investment Strategies
Vining Sparks IBG, LP