March 1, 2021
The Federal Reserve’s aggregate mortgage buying totaled $32.5bn last week. The most heavily purchased securities were 30-year UMBS 2.0s and 1.5s with total volumes of $13.3bn and $6.9bn, respectively. The Fed has purchased $1.7tn in MBS during this round of QE and currently holds $2.1tn, or approximately 29% of the entire universe. However, the Fed isn’t the largest holder of agency MBS. That designation goes to financial institutions, which collectively own $2.6tn in agency mortgages.
Current Yield Spreads
Nominal spreads on MBS moved modestly on a week-over-week basis, but it was a volatile week for the MBS sector with noteworthy daily fluctuations in performance versus Treasurys and higher than normal bid/ask spreads. For example, spreads on 30-year 1.5s widened 14 bps from Monday to Thursday, but reversed course Friday and ended up 4 bps tighter on the week. 15-year production coupons (1.5s) didn’t perform as well with spreads widening 5 bps to 61 bps. The widening in 15-year MBS over the past two weeks has spreads back to where they were one year ago, prior to the Fed beginning its current QE program.
The summary below reflects purchase activity from the previous week. The sell-off shifted buying activity to higher coupons and longer finals. Activity was led by UMBS 30-year 2.0s and 30-year jumbo 2.0s, followed by UMBS 15-year 1.5s.
- UMBS 10-year 1.5s & 2.0s
- UMBS 15-year 1.0s to 2.5s – (1.0s and 1.5s were the most traded)
- UMBS 20-year 1.5s to 2.5s (2.0s the most traded)
- UMBS 30-year 1.5s to 3.5s (2.0s the most traded, up from 1.5s the prior week)
- FNMA 15-year jumbo 1.5s and 30-year jumbo 2.0s
- GNMA 15-year jumbo 2.0s and 30-year jumbo 1.5s & 2.0s
- 15- and 30-Year 1.5s to 3.0s LLB Pools ($85k -$200k max loan size) and NY/FL collateral
- Custom CRA Pools
Given robust refinance activity, portfolio managers continue to seek prepay protection to avoid potentially low or negative yields. Many investors have turned to specified pools (lower loan balances, NY/FL collateral, investor loans) to help partially mitigate faster prepay speeds. The graph below highlights monthly prepayment speeds on different collateral types.
Prepay Friction – 30-Year 2.5s of 2020
Mortgage Rates and Applications
Mortgage rates are now moving more closely to Treasury yields as the reduction in the primary/secondary mortgage spread has started to absorb less of the backup in Treasury yields. The 15-year mortgage rate increased 10 bps to 2.53% and the 30-year rate increased 21 bps to 3.25%, according to the Bankrate.com weekly survey. The 30-year at 3.25% remains historically low but is up 39 bps since mid-December.
Mortgage application volume decreased 11.4% during the week ended Feb. 19, according the Mortgage Bankers Association’s survey. Applications for refinances decreased 11.0% compared with the previous week while applications for purchases decreased 12.0%. The refinance index has dropped back below the 4000 level and is down 20% over the last three weeks. Some of the weakness could be attributable to severe winter weather that shut-down parts of the country.
The primary/secondary mortgage spread (average 30-year mortgage rate minus 30-year MBS current coupon) declined 3 bps to 1.36%. The spread has narrowed 67 bps since hitting a high of 2.03% in early March 2020. The narrowing has been due to the mortgage industry dramatically adding headcount to lift capacity constraints. A reversion to the 5-year average of 1.22% would result in a reduction of 14 bps in 30-year mortgage rates.
Michael S. Erhardt, CPA
Senior Vice President, Investment Strategies
Vining Sparks IBG, LP