FRM Update

March 29, 2021

Fed Support   

The Federal Reserve’s aggregate mortgage buying totaled $26.1bn last week.  The most heavily purchased securities were UMBS 30-year 2.0s and 2.5s with total volumes of $11.2bn and $4.9bn, respectively. The Fed announced it will not be targeting UMBS 30-year 1.5s in the upcoming mortgage-bond purchase schedule, as production in that coupon has faded with the backup in rates.

Current Yield Spreads

Last week nominal spreads on 15-year MBS (1.5s) tightened 2 bps to 63 bps, while 30-year MBS (2.0s) tightened 6 bps to 72 bps. 15-year 1.5s have widened 33 bps this year, which has sparked interest from investors looking for lower dollar prices and higher projected yields.  30-year 1.5s widened 4 bps on news the that Fed will be removing this coupon from its purchase schedule.

Trading Activity

The summary below reflects purchase activity from the previous week. Activity was led by 30-year Jumbos and UMBS 15-year 2.0s. Spreads on 30-year lower-coupon Jumbos have widened recently and prepayment models now project yields over 2.00% with rates unchanged.

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

U.S. mortgage rates pulled back last week according to  The 30-year mortgage rate decreased 10 bps to 3.22% while the 15-year mortgage rate fell 5 bps to 2.47%.  The 30-year rate has increased 32 bps this year but remains low from a historical point of view.

The MBA mortgage refinance applications index fell 5.1% in the week ended March 19 after falling 4.2% the prior week. The refinance index has declined 29% since the first week in January and is at its lowest level since September 2020.  The mortgage application index declined 2.5% after falling 2.2% last week.

The primary/secondary mortgage spread (average 30-year mortgage rate minus 30-year MBS current coupon) held firm last week at 1.30%. The spread has narrowed 20 bps this year, while the 10-year Treasury yield has increased 76 bps. 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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