March 21, 2022
Current Yield Spreads
The Treasury market sold off last week as the Federal Reserve voted to raise its target rate by 25 bps to a range of 0.25%-0.50% and signaled the need for a more rapid pace of tightening for the remainder of the year as it seeks to slow down the fastest inflation in 40 years. Chair Jay Powell indicated the FOMC could announce and begin reducing its balance sheet at the next meeting scheduled in May. Powell didn’t mention a need to sell assets and stated the process of shrinking the balance sheet would look “very familiar”, indicating the reduction will likely be accomplished through roll off versus sales. This was welcomed news in the MBS market and spreads tightened in response. Nominal yield spreads on 15-year MBS current coupon production tightened 1 bp to 36 bps, while yield spreads on 30-year MBS to Treasurys with similar duration tightened 6 bps to 95 bps.
Trading activity for the last week was heavily focused on the 15-year sector. The most prevalent coupons in the 15-year sector were newer production 2.5s & 3.0s. There was also demand for UMBS 20-year 3.0s and modest activity in 10-year passthroughs and non-deliverable paper (30-year Jumbo 2.5s & 3.5s).
Mortgage Rates & Applications
Mortgage rates moved sharply higher for the second consecutive week. Both the 15- and 30-year rates increased 22 bps to 3.78% and 4.55%, respectively. Mortgage rates have now risen ~125 bps this year. Mortgage applications fell 1.2% in the week ended March 11 after jumping 8.5% in the week prior. Despite the increase in mortgage rates, the highest level since May 2019, purchase applications tagged a modest 0.7% gain onto the prior week’s 8.6% jump. Refinance applications, however, pulled back 2.8% following an 8.5% gain.
Michael S. Erhardt, CPA
Senior Vice President, Investment Strategies