June 17, 2019
Yield spreads on current production MBS to Treasurys widened significantly last week. The 15-year widened 4 bps to 54 bps, while the 30-year widened 11 bps to 79 bps. Z-spreads (see chart below) are now approaching some of the widest levels observed in recent years.
We continue to see strong two-way flow from investors. The rally has provided investors the opportunity to sell lower performing securities. This, along with supply levels, may explain the underperformance to Treasurys last week.
The refi index jumped 50% in the latest reading from the Mortgage Bankers Association. Refi concerns continue to weigh on investor mentality and purchases have generally been focused on lower-premium pools with less negative convexity profiles.
Last week we saw heavy buying in newer 20-year pools from investors looking for yield and a continued emphasis on FN ACE floaters. 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 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.
- 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.
- 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 ~1.86%.
Mortgage Rates and Refinance Activity
Benchmark mortgage rates declined noticeably last week. 15-year mortgage rates decreased 5 bps to 3.22%, while 30-year mortgage rates fell 10 bps to 3.93%.
Data from the Mortgage Bankers Association showed applications surged in the week ended June 7 as mortgage rates tumbled to new 21-month lows amid last week’s Treasury rally. Total mortgage applications spiked 26.8%, the second-largest weekly gain of the cycle, to send the index to its highest level since September 2016. In the details, refinancing activity soared 46.5%, also the second-best week of the cycle, to push the index to its highest level since rates popped higher after President Trump’s 2016 election victory. Lower rates also boosted purchases, which posted their second best week of the year. Total purchase applications rose 10% from the week prior, were also up 10% from a year ago, and ended a four-week run of weakness. While inconsistent across other housing reports, the applications data in 2019 have several times reflected a silver lining of uncertainty and lower interest rates.
Michael S. Erhardt, CPA
Senior Vice President, Investment Strategies
Vining Sparks IBG, LP