FRM Update

March 22, 2021

Fed Support   

The Federal Reserve’s aggregate mortgage buying totaled $27.2bn last week.  Purchases of 30-year 1.5s have steadily dwindled with lighter production for lower coupons. The most heavily purchased securities were 30-year UMBS 2.0s and 2.5s with total volumes of $12.0bn and $3.3bn, respectively.

The Fed has purchased over $1.7tn in MBS during this round of QE and currently holds $2.1tn, or approximately 29% of the entire universe. The Fed is currently adding $120bn of Treasuries and $40bn of MBS monthly to its balance sheet.  At its meeting last week, the central bank indicated that it didn’t plan to hike interest rates through 2023 and that it would continue its program of bond buying.

Current Yield Spreads

The MBS sector gave up a bit of ground to Treasuries last week as spreads widened. Nominal spreads on 15-year MBS widened 16 bps to 65 bps, while 30-year spreads widened 5 bps to 78 bps. 15-year 1.5s have widened 35 bps this year. Investors have taken advantage of the cheapening trend as we saw strong buying last week in 15-year 1.5s and 2.0s.

Trading Activity

The summary below reflects purchase activity from the previous week. Activity was led by UMBS 20-year 1.5s and 30-year 2.5s, as buyer welcomed duration and higher projected yields.

TBA-Eligible Securities:

Non-Deliverable Securities:

Specified Pools:

Despite the backup in rates, 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 pushed higher last week according to  The 30-year mortgage rate increased 9 bps to 3.32% while the 15-year mortgage rate increased 3 bps to 2.53%.  The 30-year rate has increased 47 bps since early February. However, a 30-year mortgage rate of 3.32% is still very low from a historical point of view.

Mortgage applications for the week ending March 12 fell 2.2% as a 4.2% drop in refinance applications outpaced a 1.8% increase in purchase applications.  Despite rising mortgage rates and higher home prices buyers have continued to purchase homes at a brisk pace. The Mortgage Bankers Association’s refinance application index is down 19% over the last month yet its purchase applications index has risen over 11% during the same period.

The primary/secondary mortgage spread (average 30-year mortgage rate minus 30-year MBS current coupon) declined 2 bps to 1.30%. The spread has narrowed 64 bps since hitting a 52-week high of 1.94% in early August 2020.  The pace of tightening has leveled out in recent weeks. The narrowing has been partially due to the mortgage industry adding headcount to lift capacity constraints. The current spread of 1.30% remains slightly elevated compared to the 5-year average of 1.23%, which implies there’s still some room for a modest reduction to support mortgage rates.

Michael S. Erhardt, CPA

Senior Vice President, Investment Strategies

Vining Sparks IBG, LP

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