March 2, 2020
Nominal spreads on current-coupon MBS compared to Treasurys widened last week, with 15-year increasing 3 bps to 66 bps, and 30-year climbing 9 bps to 107 bps. The widening has been helpful as it has mitigated at least some of the dramatic decline in Treasury yields.
As spreads have widened in recent weeks, we have seen continued demand for 15- and 20-year pools with relatively low coupons and dollar prices. Investors have become somewhat defensive and amortizing product continues to look attractive because of the scheduled cash flow profile.
The improvement in pricing has certainly caught the attention of investors as we’ve seen a pick-up in bid lists and selling. Investors are generally trying to clean up pools that exhibit some type of weakness or have performed poorly (low loan count, aggressive servicers, etc.). Focusing on coupons with significant duration loss in declining rate environments is also another way to pick potential sell candidates.
In terms of investing activity, most investors have steered towards 15-year 2.0s and 20-year 2.5s and 3.0s. There’s also been consistent demand for non-deliverable pools collateralized by jumbo loans (GNMA & FNMA 30-year 3.0s and 3.5s.) Be sure to pay close attention to the gross weighted average coupons (WAC) of collateral when evaluating pools. On some of the major pools, its not uncommon to see underlying loan rates 75 bps higher than the coupon of the pool.
Mortgage Rates and Refinance Activity
Mortgage rates decreased last week, with 15-year falling 10 bps to 3.07% and 30-year decreasing 6 bps to 3.62%. Mortgage applications for the week ending February 14 fell 6.4% on a 3.4% drop in purchase apps and an 8.0% drop in refis. Despite the softer results, the broader trends remain positive for housing. Mortgage rates remain within 5 bps of the 2016 low and 15 bps of the 2012 low.
Michael S. Erhardt, CPA
Senior Vice President, Investment Strategies
Vining Sparks IBG, LP