June 24, 2019
Current production MBS outperformed Treasurys last week as yield spreads tightened. 15-year tightened 7 bps to 47 bps, while 30-year tightened 12 bps to 67 bps. Yield spreads remain at some of the cheapest spread levels observed in recent years, despite the tightening last week.
Activity continues to reflect consistent two-way flow as the bond market rally has provided investors the opportunity to sell lower-performing securities and to reposition. 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 or buying activity has generally been focused on lower-premium pools with less negative convexity profiles. Par or discount paper continues to be hard to source with the exception of seasoned pools. 10- and 15-year 2.0s are the only coupon currently trading at a discount. The following is a list of actively traded sectors and coupons:
- 15-Year 3.0s & 3.5s – Current production pools trading in the $102 to $103 range.
- 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.
- 30-year 3.0s and 3.5s – These pools have been relatively immune to call risk, unlike the premium coupons.
Mortgage Rates and Refinance Activity
Benchmark mortgage rates were relatively stable last week. 15-year mortgage rates decreased 4 bps to 3.18%, while 30-year mortgage rates increased 2 bps to 3.95%.
Mortgage applications ticked lower but the trend remains positive. Mortgage applications for the week ending June 14 fell 3.47% on a 3.52% decline in purchase applications and a 3.46% drop in applications for refinance. Despite the weekly decline, the recent trend in purchase applications points to a 2% to 3% gain for home sales in coming months. As Treasury yields have fallen, the 30-year mortgage rate has now fallen from a peak of 5.17% in November to under 4.00%.
Michael S. Erhardt, CPA
Senior Vice President, Investment Strategies
Vining Sparks IBG, LP