July 24, 2017
Mortgage yield spreads were mixed and activity was generally slow as Treasury yields grinded lower again last week. Mortgage rates were also mixed last week (15yr down 3bps and 30yr up 1bp) and mortgage applications for the week ending July 14 rose 6.3% with both purchase and refinance applications increasing. Housing starts and building permits were stronger than expected in June, while the homebuilder confidence headline index fell to the lowest reading since the election.
- Mortgage yield spreads were mixed last week:
- 15-year MBS yield spreads ended the week 1bp tighter to Treasuries and swaps
- 30-year MBS yield spreads ended the week 1bp wider to Treasuries and swaps
- Curve slope measured by 2- and 10-year Treasuries flattened 7bps last week from 96 to 89bps; flattest curve spread since June 28th.
- Investors were active last week in 10yr 2.5%s and newer production 15yr MBS, primarily in 3.5% coupons.
- Investors were also active in seasoned 30yr MBS in 3.5% and 4% coupons.
- A combination of higher yield versus bullets and deference to convexity inspired activity in multi-family FNMA DUS with 7yr maturities.
Trading activity in CMOs was on the slower side and yield spreads in CMOs were generally unchanged last week. 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.
- Investors were also active in VADM’s, offering extension protection from structure and shorter stated final maturities.
Rates and Refis
- Mortgage rates were mixed last week.
- 15-year mortgage rates fell 3bps to 3.02%
- 30-year mortgage rates rose 1bps to 3.84%
- 15- and 30-year fixed mortgage rates have now fallen 22bps respectively year-to-date; however; mortgage rates are 41 and 33bps higher than this time last year.
- Mortgage applications for the week ending July 14 rose 6.3% on a 1.1% increase in purchase apps and a 13.0% increase in refi apps. Eliminating the WoW noise, the 4-week moving average for purchase apps shows a continued, albeit small, rise in new applications. The 4-week moving average for refi apps remains very low, but has trended fractionally higher since hitting an 8-year low in January.
- After declining for three consecutive weeks, the MBA Refi Index rose 13% last week to 1368. Refinance activity remains at historically low levels and the Refi Index reveals that burnout dominates an unincentivized population of mortgage holders this year.
Housing Data Improves While Builder Sentiment Pulls Back
The June Housing Starts and Building Permits data were stronger than expected with starts rising 8.3% (exp. +6.2%) and permits rising 7.4% (exp. 2.8%). There were also positive revisions to the May housing starts data. Starts were bolstered by a 6.3% increase in single family activity and a 13.3% jump in multi-family. On a YoY basis, housing starts are now up 2.1%, the best rate of gain in four months. Permits were lifted by a 4.1% increase in single family permits and a 13.9% jump in the volatile multi-family series. Building permits are now up 5.1% YoY.
The homebuilder confidence headline index fell back from 66 to 64, the lowest reading since the election with analysts speculating that builders are becoming 1) less confident in legislative changes from Washington and 2) more concerned the Fed could lose control of longer interest rates pushing mortgage rates higher and 3) supply-side costs are rising putting more pressure on builders to contain costs at a time when buyers could be becoming more price sensitive.
Dan Stimpson, CPA
Senior Vice President