March 8, 2021
The Federal Reserve’s aggregate mortgage buying totaled $31.7bn last week. The most heavily purchased securities were 30-year UMBS 2.0’s and 1.5’s with total volumes of $15.5bn 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 buying $120bn of Treasurys and $40bn of MBS monthly. Fed officials are presumably committed to this pace for the foreseeable future, which continues to serve as a tailwind for the sector.
Current Yield Spreads
The MBS sector has reversed course to begin March with steady outperformance versus Treasurys. Last week nominal spreads on 15-year MBS tightened 4 bps to 57 bps, while 30-year spreads tightened by 5 bps to 79 bps. Despite the current run, spreads on 15-year production coupons (1.5s) have widened 15 bps over the past month and 27 bps year-to-date, as investors have seemingly shifted to higher coupons in fear of a continued backup in rates.
The summary below reflects purchase activity from the previous week. We’ve seen investors move up the coupon stack in 20- and 30-year paper. Overall activity was led by UMBS 15-year 1.5s, 20-year 2.0s, and 30-year 2.0s.
- UMBS 10-year 1.5s
- UMBS 15-year 1.0s to 2.5s – (1.5s the most traded)
- UMBS 20-year 1.5s to 2.5s (2.0s the most traded)
- UMBS 30-year 1.5s to 2.5s (2.0s the most traded)
- FNMA 15-year jumbo 1.5s and 30-year jumbo 1.5s to 2.5s
- GNMA 15-year jumbo 1.5s & 2.0s and 30-year jumbo 2.5s & 3.5s
- 15- and 30-Year 1.5s to 3.0s LLB Pools ($85k -$175k max loan size) and NY/TX collateral
- Custom CRA 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 have begun to stabilize after pushing higher over the past several weeks. Last week the 15- and 30-year mortgage rates decreased 2 bps to 2.51% and 3.23%, respectively. The 30-year rate at 3.23% remains historically low but is up 36 bps since mid-December.
Mortgage applications for the week ending February 26 rose 0.5% as purchase apps recovered 1.8% after the snowstorm week. Refi applications inched up 0.1% for the week, the first increase in four weeks.
Homeowners continued to take advantage of historically low mortgage rates during February as prepayments were broadly higher compared to January. Prepayment speeds on 30-year 3.0s remain the leader in the 30-year coupon stack, increasing 7% from the previous month to 44 CPR. Speeds on UMBS 15-year 2.5s to 3.5s continue to be elevated, averaging 28.4 CPR during February. Please see here for our complete prepayment commentary.
The primary/secondary mortgage spread (average 30-year mortgage rate minus 30-year MBS current coupon) was relatively stable last week, increasing 1 bp to 1.37%. The spread has narrowed 66 bps since hitting a high of 2.03% in early March 2020, but the pace of tightening has leveled out in recent weeks. The narrowing has been due to the mortgage industry dramatically adding headcount to lift capacity constraints. The 5-year average is 1.22%, which implies there’s still some room for a modest reduction to support lower mortgage rates.
Michael S. Erhardt, CPA
Senior Vice President, Investment Strategies
Vining Sparks IBG, LP