June 10, 2019
Mortgages outperformed Treasurys during the past week as yield spreads on current production MBS to Treasurys tightened. The 15-year tightened 2 bp to 48 bps, while the 30-year tightened 5bps to 67 bps.
June-released factors showed that May fixed-rate prepayments increased for all three agencies for the fourth consecutive month. The increases were not quite as large as March and April, but still relatively substantial. Regarding speeds next month, it seems reasonable to expect prepays to more or less remain at current levels. In the following month though, given the recent, and somewhat sudden decline in rates, it’s possible we could see further increases. Please click here for a complete commentary on June MBS prepayment speeds.
The improvement in valuations has been a catalyst for bond swap activity as investors have been active with dispositions of lower performing securities. For reinvestment, the increase in prepayment speeds coupled with the significant decline in rates has investors focusing on lower coupon pools with less negative convexity profiles.
The following is a list of actively traded sectors and coupons:
- 15-Year 2.0s – Pools with 2- to 3-years of seasoning have been in heavy demand with investors targeting positions with decent down rate profiles. Because of the rally, 15-year 2.0s are the only coupon trading at a discount.
- 20-Year 2.5s – Higher duration pools with 1- to 2-years of seasoning have been a targeted by investors seeking cash flow and the potential for modest price appreciation with declining rate scenarios.
- Off-The-Run-Collateral – Buyers seeking higher yields have focused on newer production 30-year pools collateralized by jumbo loans and other pools consisting of relocation loans.
- 20-Year 3.0s and 3.5s – Newer production pools also offer higher projected yields, and tend to perform relatively well in stable to rising interest rate scenarios.
- FN ACE Floaters – Floaters (tied to LIBOR) are still in demand as investors are attracted to the absolute yield at approximately 2.90%. Even with two Fed rate cuts of 25 bps, these securities are projected to yield 2.40%, which is obviously better than going out further on the yield curve, with the 5-year currently yielding ~1.88%.
Mortgage Rates and Refinance Activity
Benchmark mortgage rates were relatively stable last week. 15-year mortgage rates decreased 2 bps to 3.27%, while 30-year mortgage were firm at 4.03%.
After declining 3.3% the previous week, mortgage application volume increased 1.5% on an adjusted basis during the week ending May 31st. The results include an adjustment for the Memorial Day Holiday. Applications for refinancing increased 6.0%, while applications for purchases decreased 2.0%. The refinance share of mortgage activity increased to 42.2% of total applications, up from 39.7% the previous week.
Michael S. Erhardt, CPA
Senior Vice President, Investment Strategies
Vining Sparks IBG, LP