March 26, 2018
MBS yield spreads versus Treasuries widened as Treasury yields fell across the curve. Mortgage rates rose last week continuing the trend higher this year, while mortgage applications fell for the first time in a month. Refi apps fell 4.5% after falling 2.2% the prior week. Refinance share of mortgage applications (38.5%) fell to the lowest level since 2008. Housing reports released last week were mixed. Existing home sales topped estimates, while new home sales fell for the third consecutive month.
- Mortgage yield spreads widened last week.
- 15-year MBS yield spreads ended the week 3 to 4bps wider to Treasuries and swaps.
- 30-year MBS yield spreads ended the week 1 to 3bps wider to Treasuries and swaps.
- Curve slope measured by 2- and 10-year Treasuries steepened from 55 to 56bps.
- Investors were active in seasoned 15yr MBS in coupons ranging from 2.5% to 3% and in newer production 3.5% coupons.
- A combination of higher yield versus agency bullets and deference to convexity inspired activity in multi-family FNMA DUS with 7 years to maturity.
- 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 versus the Treasury curve were mixed last week as shorter structures widened 4 to 5bps, while longer CMO structures tightened 1 to 2 bps. CMO yields of 3% or higher are attainable for typical bank-type structures. Significant investor activity is focused on those structures that offer 3% yields or higher with weighted average lives typically ranging from two to five years (base case) and up to seven years (+300bps). Investor activity has primarily been focused in front sequential and VADM structures with coupons typically ranging from 4% 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 3bps to 3.75%, 56bps above the 12-month average of 3.19%.
- 30-year mortgage rates rose 3bps to 4.33%, 41bps above the 12-month average of 3.92%.
- 15-year mortgage rates have risen 55bps in 2018, while 30-year mortgage rates are up 48bps YTD.
- Mortgage applications fell 1.1% during the week ended March 16th, which is the first decline in applications since February 16th. Purchase apps rose 1.4% after rising 3.4% the prior week. Refi apps fell 4.5% after falling 2.2% the prior week. Refinance share of mortgage applications (38.5%) fell to the lowest level since 2008.
- The MBA Refi Index fell 4.5% to 1108, below its 12-month average of 1332. Refinance activity continues to be historically low and range-bound averaging a low index level of 1225 since the beginning of the year and has been pushed lower by increasing mortgage rates in 2018.
- Existing homes sales rose more than expected in February, up 3.0% MoM on gain in the South and West. The rebound occurred despite the median price ticking back up and supply remaining very tight. Month’s supply held at 3.4, well below the 6.0 considered balanced.
- February’s new home sales were about as expected, an annualized pace of 618k, and the prior three months’ tally was revised up by 54k. However, momentum remains negative as sales have now declined in three straight months.
Dan Stimpson, CPA
Senior Vice President