FRM Update

March 1, 2021

Fed Support

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.

Trading Activity

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.

TBA-Eligible Securities:

Non-Deliverable Securities:

Specified 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 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

The information included herein has been obtained from sources deemed reliable, but it is not in any way guaranteed, and it, together with any opinions expressed, is subject to change at any time. Any and all details offered in this publication are preliminary and are therefore subject to change at any time. This has been prepared for general information purposes only and does not consider the specific investment objectives, financial situation and particular needs of any individual or institution. This information is, by its very nature, incomplete and specifically lacks information critical to making final investment decisions. Investors should seek financial advice as to the appropriateness of investing in any securities or investment strategies mentioned or recommended. The accuracy of the financial projections is dependent on the occurrence of future events which cannot be assured; therefore, the actual results achieved during the projection period may vary from the projections. The firm may have positions, long or short, in any or all securities mentioned. Member FINRA/SIPC.
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