July 29, 2019
Yield spreads for current production coupon MBS to Treasurys moved modestly wider last week. 15-year MBS widened by 3 bps to 55 bps while 30-year widened 1 bp to 74 bps. Mortgage spreads remain relatively wide versus historical levels (see Z-Spread graph below).
Activity over the past week has been concentrated in 15- and 20-year MBS and 30-year pools collateralized by non-conforming jumbo loans (3.0s and 3.5s). Investors continue to focus on lower coupon pools because of prepayment risk, despite the fact that higher coupons offer superior projected option-adjusted spreads.
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 offer relatively attractive spreads with rates unchanged or declining rate environments.
- 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 3.0s 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.
- Off-The-Run-Collateral – Buyers seeking higher yields have focused on new and seasoned 30-year pools collateralized by non-conforming jumbo 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 mixed last week. 15-year mortgage rates declined 3 bps to 3.20%, while 30-year mortgage rates increased 3 bps to 3.87%.
Mortgage applications fell 1.9% for the week ending July 19 on a 1.6% decline in purchase apps and a 2.1% increase in refis. Mortgage rates fell during the reference week back to within 4 bps of the recently set, two-year low. The 30-year rate is now down 1.09% since November. Despite the precipitous drop in rates, housing activity has struggled to reignite with most of the major sales and price metrics remaining sluggish. On a positive note, the 4-week moving average for mortgage purchase applications is up 20% since November and the average for refis is now up 127%. Nonetheless, activity remains tame versus historical norms.
Michael S. Erhardt, CPA
Senior Vice President, Investment Strategies
Vining Sparks IBG, LP