FRM Update

June 4, 2018


Despite a fair amount of volatility in the global bond markets, mortgage yield spreads ended the week close to where they started. 15-year MBS yield spreads ended the week 2bps tighter to Treasuries, while 30-year MBS yield spreads tightened 1bps.


MBS activity was relatively subdued, partially due to the holiday-shortened week and the flight to quality stemming from geopolitical concerns. 15-year MBS with coupons ranging from 2.5% to 3.5% remained popular with financial institutions. More broadly, a significant amount of investor demand this year has been centered on seasoned 15-year 2.5’s and 3.0’s. The flattening yield curve has resulted in a relatively small pay up over TBAs for pools with seasoning and shorter WAMs. In some cases, investors can potentially receive an outsized reduction in price volatility for a modest trade-off in projected yield. For investors that favor deeper discounts, 15-year 2.5s have underperformed over the last month compared to higher coupons.









Mortgage Rates and Refinance Activity






Mortgage Applications Pull Back:  Mortgage applications for the week ending May 25 fell 2.9% on another 4.7% decline in refi apps and a 1.9% drop in purchase apps.  Mortgage rates did pull back during the reference week with the 30-year mortgage rate dropping from 4.53% to 4.42%.  The 4-week moving average for refi apps has now dropped to its lowest level in over 10 years.  Purchase apps continue to trend higher, broadly, but potential homebuyers reference weak inventory and rising prices as a growing challenge – more so than higher mortgage rates at this point.   

April’s Disappointment for Housing Continued in the Pending Sales Data: April was unfriendly to the trend lines in the key housing related reports. After data last week showed larger-than-expected declines for both new and existing home sales, the pending sales report did little to brighten the outlook. Pending sales fell 1.3% in April, worse than the modest 0.4% gain economists were expecting. New contract signings in the Northeast were flat after a steep 5.6% decline in March. Activity in the Midwest and South pulled back from improvements the month before and the West saw fewer deals MoM for a seventh consecutive month. A slower pace for pending contracts calls into question hopes for any positive momentum in the existing sales series in the months ahead.

Home Prices Not Slowing Down: The S&P CoreLogic Case-Shiller U.S. National Home Price NSA Index reported a 6.5% annual gain in March, the same as the previous month. The 10-City Composite annual increase came in at 6.5%, up from 6.4% in the previous month.  The 20-City Composite posted a 6.8% year-over-year gain, no change from the previous month.





Michael S. Erhardt, CPA

Senior Vice President

Investment Strategist

Vining Sparks, IBG

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