July 8, 2019
Current-production coupon MBS outperformed Treasurys last week as rates backed up. 15-year tightened 4 bps to 47 bps, while 30-year tightened 3 bps to 70 bps. Yield spreads remain at some of the widest levels observed in recent years.
Activity moderated during the holiday-shortened week. However, in recent weeks investors have been active with dispositions of lower performing securities and odd-lot positions. A prominent trade has been to sell seasoned TBA deliverable FNMA/FHLMC 10- and 15-year into the TBA bid. The TBA bid for seasoned pools can result in a negative take-out yield (projected yield to the buyer) to the Treasury curve. The trade works best for coupons ranging from 3.00% to 4.00% with a current weighted-average maturity of 80 months or less.
Reinvestment and outright buying activity has generally been focused on lower-premium pools with less negative convexity profiles. Not surprisingly, lower coupons have appreciated the most this year, given their longer durations. Higher coupons have lagged lower coupons into the interest rate rally as convexity concerns have taken center stage.
Prepayments speeds were released Friday and were largely in-line with expectations. Overall speeds were modestly lower than last month but remain elevated. Our monthly prepayment commentary will be issued later today.
The following is a list of actively traded sectors and coupons:
- 15-Year 2.0s & 2.5s – 2.0s remain the only coupon trading at a discount. Pay-ups over TBA remain modest for 2.5s.
- 15-Year 3.0s & 3.5s – With prices well above par for these coupons, investors have targeted seasoned pools to help mitigate prepayment exposure.
- 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.
- 30-Year 3.0s and 3.5s – These pools have been relatively immune to call risk, unlike the premium 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.
Mortgage Rates and Refinance Activity
Benchmark mortgage rates were relatively stable last week. 15-year mortgage rates ticked up 5 bps to 3.22%, while 30-year mortgage rates increased 3 bps to 3.83%.
Total mortgage application volume was essentially flat last week compared with the previous week, according to the Mortgage Bankers Association. Volume fell 0.1% for the week but was 41% higher than the same week one year ago, thanks to much lower interest rates. Applications to refinance a home loan decreased 1% for the week, but were 93% higher than the same week one year ago.
Michael S. Erhardt, CPA
Senior Vice President, Investment Strategies
Vining Sparks IBG, LP