June 5, 2017
Activity improved late last week as bid list inquiries picked up in the MBS and CMO sectors as bonds rallied on Friday. Yield spreads widened a couple of basis points and the curve flattening continued last week. Mortgage rates held at the lowest levels this year and were generally unchanged. Mortgage applications fell 3.4% as purchase applications weakened for a third consecutive week. Refi apps and mortgage prepayments remain very low relative to recent history; however, May prepayment speeds, scheduled for release mid-week, are expected to increase MoM due to an increase in day count. Pending home sales fell 2.5% in April to close out a disappointing month for the housing sector.
- Mortgage yield spreads widened last week:
- 15-year MBS yield spreads ended the week 1 to 2bps wider to Treasuries and swaps
- 30-year MBS yield spreads ended the week 2 to 3bps wider to Treasuries and swaps
- The Treasury curve flattened another 8bps last week from 94 to 86bps between 2 and 10 year Treasuries; the flattest curve since October 2016
Trading activity in CMOs was generally light last week, but bid list inquiries and swap activity did improve as bonds rallied on Friday. Similar to the MBS sector, yield spreads in CMOs widened 1 to 3 bps last week. The flattening of the curve is not conducive to strong supply from new CMO production and the availability of specific structures continues to limit activity in the sector. Depositories were focused on stable structures with 4- to 5-year average lives.
Rates and Refis
- Mortgage rates held at the lowest levels this year:
- 15-year mortgage rates were unchanged at 3.19%
- 30-year mortgage rates fell 1bp to 3.94%
- 15 and 30-year fixed mortgage rates have now fallen 36 and 38bps respectively year-to-date; however; mortgage rates are 27 and 28bps higher than this time last year.
- Mortgage applications fell 3.4% as purchase applications weakened for a third consecutive week. Refinance applications dropped 5.6% after last week’s 10.5% improvement and accounted for 43.2% of the total weekly volume. Looking through the weekly noise using a four-week rolling average, the gap remains wide between refinance and purchase activity since the election. However, refinancing has stabilized and slowly recovered since reaching a trough in late December.
Home Prices Continue to Press Higher: The March S&P CoreLogic Case-Shiller Home Price Index showed home prices increased 5.89% YoY as demand remains solid and inventories remain tight. The YoY increase was the fastest since the summer of 2014. Persistent firming in the U.S. labor market has continued to kindle steady demand, while supply remains at historically low levels. Supply of existing homes was just 3.8 months in March, well below the 6 months considered a good balance between supply and demand.
Pending Homes Sales Decline: Pending home sales unexpectedly declined in April to complete a disappointing month for the U.S. housing sector. The 1.3% MoM decline in contracts signed on existing home sales was weaker than expectations for a 0.5% bounce back. YoY pending sales declined the most since the summer of 2014. The trend in pending sales remains sideways (since the middle of last year) and offers little sign of any change momentum in pending sales.
Construction Spending Disappoints: Construction spending fell 1.4% in April compared with expectations for a 0.5% improvement. Despite positive revisions to the prior two months’ results, April’s spending levels fell short of estimates. Non-residential spending declined for a third straight month and a pullback in spending on home improvements offset a seventh consecutive month of increased spending on construction of new single-family homes.
Dan Stimpson, CPA
Senior Vice President