June 1, 2020
Fed Intervention and Yield Spreads
Over the past ten weeks, the Fed has purchased nearly $700bn of agency MBS as part of its effort to stabilize the sector. The buying has been focused on the 30-year pools with lower coupons. To put the scale of buying into context, during the sums of QE1 in 2008/2009 and QE3 in 2012/2013, the Fed bought ~$1.4tn of mortgages; each of these episodes took over a year to complete.
The Fed has gradually lowered its planned purchases since the start of QE4. The daily total of mortgage purchases has been reduced from a peak of ~$50bn/day to ~$4.5bn/day. Last week the Fed purchased $18bn of agency MBS. 42% of that total were in UMBS 30-year 2.5% for June settle, 15% in UMBS 30-year 3% for June settle, and 10.3% in UMBS 30-year 2% for June settle.
The historic level of Fed purchases has significantly reduced price and spread volatility in the sector. The feverish pace of the Fed support in March brought spreads from the wides that rivaled the level reached in 2008/2009. Nominal 30-year mortgage spreads to Treasurys touched a stressed level of almost 150 bps. Within a week of Fed’s intention to purchase up to $50bn per day of agency MBS, spreads came in to 75 bps.
Nominal spreads for production MBS to Treasurys were wider on a week-over-week basis, with 15-year widening 5 bps to 78 bps and 30-year widening 7 bps to 117 bps. Over the past month, spreads have gradually widened in response to the Fed’s calibration of purchase activity.
Investor Trading Activity
There was steady trading activity last week with customers generally buying securities. New purchase activity has been focused on what the Fed isn’t buying (non-deliverable MBS securities), as these products generally offer wider spreads.
Last week activity included the following:
- GNMA Jumbos (MJM 2.5s to 3.0s)
- FNMA Jumbos (FNCK 2.5s to 3.0s)
- UMBS 15-year 2.0s (new production)
- UMBS 15-year 2.5s (seasoned)
- UMBS 20-year 2.0s (new production)
Mortgage Rates and Refinance Activity
According to Freddie Mac’s Primary Mortgage Market Survey, mortgage rates drifted lower last week with the 15-year rate declining 8 bps to 2.62% and the 30-year rate falling 9 bps to 3.15%. The 30-year fixed-rate mortgage has again hit the lowest level in the survey’s nearly 50-year history, breaking the record for the third time in just the last few months.
Refinance activity decreased 0.2% for the week ending May 22, according to the Mortgage Bankers Association. The index has declined 8 out of the last 10 reports and has dropped 46% since hitting a YTD high on March 6. The purchase index rose 8.6%, the sixth consecutive weekly gain in applications for home purchases. Purchase apps have rebounded 54% over the past six weeks and are now at a higher level than at any point in 2019.
Lenders have the primary/secondary spread at 1.94%, well above its trailing one-year average of 1.29%, in order to manage risk; it hit 2.33% on March 27, the highest in at least a decade. The spread has remained within a 10 bp range in May.
The spread could begin to narrow though, as United Wholesale Mortgage (UWM), which holds nearly a third of the market share in wholesale mortgage lending, is now offering its brokers the ability to offer borrowers 30-year fixed-rate loans as low as 2.5%. This could have a meaningful impact on refinance activity if other brokers follow UWM’s lead. Investors should continue to use caution when considering higher coupons and larger premiums.
Michael S. Erhardt, CPA
Senior Vice President, Investment Strategies
Vining Sparks IBG, LP