March 4, 2019
Yield spreads on current coupon MBS to Treasuries were mixed last week with 15-year ending the week unchanged at 48 bps, while 30-year widened 2 bps to 75 bps. Higher coupons tightened by 3 to 5 bps, likely a reaction to the curve steepening.
Depositories continue to be active in the MBS space, with an emphasis on the 20- and 30-year sectors. The following represents a summary of the activity we’ve seen in recent weeks:
- Investors seeking consistent cash flow have added current production 3.5’s and 4.0’s.
- Current production 4.0’s and 4.5’s continue to be the most prominent trade in the 15-year sector. Premium reluctant buyers have steered towards 3.0’s or 3.5’s.
- Lower coupon pools such as 15-year 2.0’s and 2.5’s have also been in demand and are generally being traded at a discount. These seasoned pools tend to have less negative convexity and exhibit better projected performance in a declining rate environment versus higher coupons.
- We’ve seen buying in both seasoned and new production pools. Most of the activity has been in current production 4.0’s. Seasoned 2.5’s at a discount tend to attract investors seeking potential appreciation with declining rates.
- Activity has picked up within this space over the past several months as depositories have focused on adding duration in order to address declining rate exposure. Tax reform and basis tightening in Municipals has also led some investors to consider longer-term MBS. A recent Strategic Insight on this topic can be found here.
- An active trade for investors seeking duration and higher yields has been in current production GN II 5.0’s and 5.5’s.
- Other trades included several custom GNMA pools designed to help depositories meet their Community Reinvestment Act (CRA) goals for 2019.
- The focus for CMBS (Fannie DUS & Freddie K’s) has generally been on discounted pools with finals in the 7-year range. This has been a prevalent trade for investors seeking locked-out cash flow, positive convexity, and higher yields.
Mortgage Rates and Refinance Activity
Benchmark mortgage rates increased slightly last week but remain relatively low. 15-year mortgage rates increased 3 bps to 3.70%, while 30-year mortgage rates increased 9 bps to 4.43%, remaining near the lowest level in a year.
Mortgage applications increased for a second week in a row. The recent downturn in mortgage rates seems to have provided some support for mortgage activity, a positive sign of potential stability for the reeling housing sector. Total purchase applications responded with a 5.3% weekly increase that was the result of stronger interest in new purchases and the refinancing of old loans. Purchase applications were up 6.1% while refinancing activity rose 4.6%.
Volatile Housing Starts Report Yet Another Disappointing Read on Housing Activity: Housing starts disastrously disappointed expectations in December, falling 11.2% MoM along with a 2.8%-lower adjustment to the November data. All told, new housing starts were almost 14% lower by the end of December than expected. This data series is prone to large revisions and can be volatile on a month-over-month basis, particularly multi-family activity. December’s weakness was in both single family (-6.7% MoM, -11.1% YoY) and multi-family (-20.4% MoM, -14.0% YoY) starts. At a regional level, the only bright spots were a 30% increase in multi-family in the Northeast and a 2% increase in single family in the South. Apart from those, every metric showed double digit declines. One silver lining to the data, new building permits did rise 0.3% MoM, primarily driven by a 45.5% MoM increase in multi-family permits in the West.
Pending Home Sales Ended Their Slide: Pending home sales finally found their footing in January after sliding in nine of the last 10 months. Total pending sales rose 4.6% to start 2019, the biggest monthly gain since October 2010 to their best pace in four months. Encouragingly, activity picked up across all four geographic regions with the two areas accounting for the largest share of existing sales leading the way. Pending sales in the South jumped 8.9%, the most since early 2010, to break a six-month downturn. Contract signings in the Midwest improved 2.8%, the best month since February 2017. The previous decline in mortgage rates was expected to eventually help stabilize activity in the housing sector. Although pending sales remained at their fourth weakest level since 2014 and down 3.2% from a year ago, the January rebound may reflect the beginning of the positive effects of lower rates.
Michael S. Erhardt, CPA
Senior Vice President, Investment Strategies
Vining Sparks IBG, LP