June 3, 2019
The global flight to safety continued to weigh on yields last week. Yield spreads on current production MBS to Treasurys tightened, with 15-year tightening 2 bp to 50 bps, while 30-year tightened 5bps to 72 bps.
The significant decline in rates has investors largely 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 were in heavy demand with investors targeting positions with decent down-rate profiles. 15-year 2.0s and 2.5s are generally the only remaining coupons trading at a discount.
- 20-Year 2.5s – Higher duration pools with 1 to 2 years of seasoning were also a popular choice with investors seeking cash flow and the potential for modest price appreciation with declining-rate scenarios.
- Off-The-Run-Collateral – Buyers seeking higher yields were drawn to newer production 30-year pools collateralized by jumbo loans and other pools consisting of relocation loans.
- 20-Year 3.5s – These newer-production pools were also popular with investors seeking higher yields, especially those with a bias towards stable to rising interest rates.
Mortgage Rates and Refinance Activity
Benchmark mortgage rates continued their decent last week. 15-year mortgage rates decreased 4 bps to 3.37%, while 30-year mortgage rates fell 2 bps to 4.00%.
Mortgage applications fell 3.3% for the week ended 5/24 despite a seventeen-month low (January 2018) in mortgage rates. Purchase applications declined 1.4%, marking a third consecutive dip and the fifth drop in the last six reports. Purchase applications strengthened from the second half of February through the first two weeks of April, but have pulled back since then even with a continued decline in the level of mortgage rates. Refinancing activity fell 6% last week after jumping 8.3% the week before, and have generally been weaker since the end of March. Lower rates should help affordability, but seemingly softer interest in new mortgages shows no clear signs of sustained improvement.
Michael S. Erhardt, CPA
Senior Vice President, Investment Strategies
Vining Sparks IBG, LP