June 12, 2017
Activity improved last week in both the MBS and CMO sectors as bonds sold off on Thursday and Friday after Comey’s Senate testimony. Yield spreads tightened a couple of basis points and mortgage rates fell 3-5bps to the lowest levels this year. Mortgage applications rose 7.1% on increases in both purchase and refinance applications. Purchase applications increased 10% to the highest level since May 2010. MBS prepayment speeds increased between a range of 16 to 18% as expected in May in line with an increase in day count. Prepayments are still relatively low in reference to the last several years. MBS prepayments next month should either hold steady or increase slightly due to a combination of technical and seasonal factors. For additional prepayment commentary and charts, please see our May Prepayment Commentary.
- Mortgage yield spreads tightened last week:
- 15 and 30-year MBS yield spreads ended the week 1 to 2bps tighter to Treasuries
- 15-year MBS yield spreads ended the week 1 to 2bps tighter to swaps
- 30-year MBS yield spreads ended the week 3bps tighter to swaps
- The mid-week Fed meeting may offer additional details on QE tapering and the unwind of MBS holdings, which are expected to begin later this year.
- Bid list and swap activity picked up last week in new and seasoned 15yr 2.5’s and 3’s, 10yr 2.5’s and seasoned 20yr 3% coupons.
- Investors were also active in multi-family FNMA DUS and uncapped floating rate ACE bonds, taking advantage of higher yield opportunities in LIBOR rates.
Trading activity in CMOs improved last week to volume levels not seen in a month and a half. Yield spreads in CMOs tightened a couple of basis point last week, similar to the MBS sector. Depositories were focused on PAC and sequential structures, conventional and jumbo collateral, ranging primarily from 4- to 5-year average lives with coupons between 2.5% and 4%.
Rates and Refis
- Mortgage rates fell to the lowest levels this year:
- 15-year mortgage rates fell 3bps to 3.16%
- 30-year mortgage rates fell 5bps to 3.89%
- 15- and 30-year fixed mortgage rates have now fallen 39 and 43bps respectively year-to-date; however; mortgage rates are 29bps higher than this time last year.
- Mortgage applications for the week ending June 2 rose 7.1% on a 10.0% increase in purchase apps and a 3.4% increase in refi apps. On a 4w/4w moving average, purchase apps have ticked higher recently and point to an improvement in home sales. Refi apps remain very low.
- The MBA Refi Index reveals that burnout dominates an unincentivized population of mortgage holders this year, but especially so for the last two months. May’s index level ended almost right on top of its year-to-date average of 1299.
May Prepayment Speeds
With the exception of a few out-of-the-money coupons, all FNMA, FHLMC, and GNMA fixed-rate MBS prepayment speeds increased between a range of 16 to 18% as expected. Many traders and investors anticipated these prepayment increases, as day count alone for the month of May should have caused a prepay jump of 15.7%. Prepayments are still relatively low in reference to the last several years with average 15- and 30-year mortgage rates unchanged from April to May. As June has the same number of collection days as May, MBS prepayments next month should either hold steady or increase slightly due to a combination of technical and seasonal factors. For additional prepayment commentary and charts, please see our May Prepayment Commentary.
Dan Stimpson, CPA
Senior Vice President