June 26, 2017
Activity was light last week in both the MBS and CMO sectors, but did improve later in the week as portfolio managers approach the deadline for quarter end settlement. Bond market volatility remains low after the Fed meeting offered additional details on QE tapering and the unwinding of MBS holdings. The MBS market has displayed almost no measurable response as MBS yield spreads have only widened a few basis points and mortgage rates have been generally unchanged over the last two weeks and are at the lowest levels this year. The MBA mortgage applications index rose for the third consecutive week to the highest level since November 2016. While refi apps increased 2.1% last week, refi activity and MBS prepayments are still relatively low in reference to the last several years. The housing data finally received some positive news with May’s new and existing home sales reports.
- Mortgage yield spreads were generally unchanged to slightly wider last week:
- 15-year MBS yield spreads ended the week 1bps wider to Treasuries and swaps
- 30-year MBS yield spreads ended the week unchanged to Treasuries and swaps
- The Treasury curve flattened another 4bps last week from 83 to 79bps between 2 and 10 year Treasuries; the flattest curve since August 2016.
- Investors were active last week in moderately seasoned 20yr MBS, primarily in 3.5% 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.
- The Fed meeting offered additional details on QE tapering and the unwinding of MBS holdings, which is expected to begin later this year subject to monthly caps outlined below.
Trading activity in CMOs improved Thursday and Friday last week as bid list activity has picked up prior to the close of the quarter. Yield spreads in CMOs were generally unchanged last week, similar to the MBS sector. Depositories were focused on stable structures with 3- to 6-year average lives in higher coupon sequential structures.
Rates and Refis
- Mortgage rates fell slightly last week and are at the lowest levels this year.
- 15-year mortgage rates fell 1bps to 3.17%
- 30-year mortgage rates fell 1bps to 3.90%
- 15- and 30-year fixed mortgage rates have now fallen 38 and 42bps respectively year-to-date; however; mortgage rates are 34bps higher than this time last year.
- Mortgage applications edged higher in the week ended June 16 as increased refinance activity offset another week of declining purchase inquiries. Total applications rose 0.6% (+2.8% prior week) as refinance inquiries grew by 2.1%, but purchase applications shrank by 1.0%. Purchase applications have slipped in five of the last six weeks, although the single week’s gain where activity actually improved was strong enough to offset the other five weeks’ declines. Refinance activity continues to be supported by the pullback in rates that has more or less defined the 2017 trend.
- The MBA Refi Index reveals that burnout dominates an unincentivized population of mortgage holders this year. After increasing for three consecutive weeks, the Index is currently 1527, which is the highest level this year and the highest since the election. However, refinance activity remains at historically low levels.
The housing data finally received some positive news with May’s new and existing home sales reports.
- Existing home sales rose 1.1% in May (exp. -0.4%) to 5.62MM annualized units, third best pace of the cycle; housing inventory declined YoY for a 24th month, the median sales price rose to $252.8k (highest on record), and the median home sold in 27 days (fastest pace on records back to 2011). Activity improved in three of four regions; sales in the Midwest declined 5.9%.
- New home sales rose 2.9% to a better-than-expected 610k annualized pace; broader trend improves after +34k revisions to prior three months; median sales price rose to $345.8k (highest on record).
Dan Stimpson, CPA
Senior Vice President