March 12, 2018
MBS yield spreads versus Treasuries tightened last week, while mortgage rates rose, continuing the trend higher this year. Mortgage applications rose for the second consecutive week and refi apps rose 1.5% after previously falling for three consecutive weeks. For the fourth month in a row, MBS prepayment speeds in February declined due to increasing mortgage rates and a decrease in day count. Prepayments in March are expected to increase, mainly because of a two day increase in day count. For additional prepayment commentary and charts, please see our February MBS Prepayment Commentary.
- Mortgage yield spreads tightened last week.
- 15-year MBS yield spreads ended the week 2 to 4bps tighter to Treasuries and 5 to 7bps tighter to swaps.
- 30-year MBS yield spreads ended the week 1bp tighter to Treasuries and 2 to 3bps tighter to swaps.
- Curve slope measured by 2- and 10-year Treasuries steepened from 62 to 63bps.
- Investors were active in newer production 15yr MBS in 3% and 3.5% coupons and in 10yr 3% coupons.
- Investors were also active in seasoned 20yr MBS, primarily in 3.5% coupons and newer 4%’s, which offer attractive yields and spreads in the sector.
- Investors were active in seasoned 30yr MBS, primarily in 3.5% coupons in HLTV collateral, which offer attractive yields and spreads in the sector.
- A combination of higher yield versus agency bullets and deference to convexity inspired activity in seasoned multi-family FNMA DUS inside of 5 years.
- Investors also remain active in uncapped floating rate multi-family bonds, taking advantage of higher yield opportunities in LIBOR rates and attractive floating rate yields.
CMO yield spreads were mixed, but generally spreads were unchanged last week and have remained stable over the prior month. Most structures were either unchanged or experienced spread changes of +/- one basis point. CMO yields of 3% or higher are attainable for typical bank-type structures. Investor activity is focused on those structures that offer 3% yields or higher base case and up 300bp weighted average lives of four to six years in front sequential and VADM structures with coupons typically ranging from 3.5% to 4.5%, with the majority of the activity last week focused on higher coupon front sequential structures.
Mortgage Rates and Refinance Activity
- Mortgage rates rose last week.
- 15-year mortgage rates rose 1bp to 3.76%, 59bps above the 12-month average of 3.17%.
- 30-year mortgage rates rose 4bps to 4.34%, 43bp above the 12-month average of 3.91%.
- 15-year mortgage rates have risen 56bps in 2018, while 30-year mortgage rates are up 49bps YTD.
- Mortgage applications rose for the second consecutive week, rising 0.3% for the week ending March 2nd and 2.7% the prior week. Purchase apps fell 0.5% after rising 6.2% the prior week. Refi apps rose after previously falling for three consecutive weeks.
- The MBA Refi Index rose 1.5% to 1186, below its 12-month average of 1341. Refinance activity continues to be historically low and range-bound, averaging a low index level of 1255 since the beginning of the year.
February MBS Prepayment Speeds
For the fourth month in a row, prepays declined across the board. FNMA, FHLMC and GNMA I MBS declined between 6% and 7% for both thirty- and fifteen-year collateral. GNMA II MBS fell 11% for thirty years and 7% for fifteen years. Increasing mortgage rates continues to hamper refinancing activity. Another important factor for this month’s prepayments was day count. February contained two less business days than January. Overall prepayments in March should increase by less than the 10.5% indicated by a two-day increase in day count. For additional prepayment commentary and charts, please see our February MBS Prepayment Commentary.
Dan Stimpson, CPA
Senior Vice President