May 1, 2017
On Monday and Tuesday trading activity improved across the MBS and CMO sectors, but it faded during the latter half of the week. Yield spreads in 15yr and 30yr fixed MBS tightened 1 to 3bps to both Treasuries and swaps last week. 30yr mortgage rates reversed the recent trend and rose for the first time in over a month. Mortgage applications rose 2.7% led by a bump in refinance applications. The increase of 7.2% in refinancing inquiries was the largest weekly gain since early August of last year. April MBS prepayment speeds are expected to slow down due to reduction in day count, which should more than offset the seasonal increase in home sales.
- Mortgage yield spreads tightened last week:
- 15yr and 30yr MBS spreads ended the week 1 to 3bps tighter to Treasuries and swaps
- Investors focused on seasoned 20yr MBS as an alternative to 15yr MBS as well as seasoned 30y MBS as an alternative to 20yr MBS.
- A combination of higher yield and deference to convexity inspired activity in multi-family Freddie K’s with 6yr maturities.
Trading activity in CMOs was also light last week with minimal changes in yields and spreads as the availability of specific structures continues to limit activity with issuance remaining quite weak and finding specific structures to match inquiries remains a challenge. Depositories were focused on stable structures with 4- to 6-year average lives, especially sequential structures.
Rates and Refis
- Mortgage rates reversed trend rising for the first time in over a month
- 15yr mortgage rates rose 4bps to 3.27%
- 30yr mortgage rates rose 6bps to 4.03%
- 15-year and 30-year fixed mortgage rates have now fallen 28bps and 29bps year-to-date; however, mortgage rates are up 39bps and 46bps post-election, respectively.
- Weekly mortgage applications rose 2.7% in the week ended April 21st led by a bump in refinance applications. The 7.2% gain in refinance activity offset a 1.0% decline in purchase applications. The weekly improvement in refinancing inquiries was the largest weekly gain since early August of last year. According to Freddie Mac’s U.S. Mortgage Market Survey, the rate on a 30-year fixed rate mortgage fell to 3.97% that week, the first sub-4% mortgage rate since the week after the election. Refinancing appears to have stabilized after the notable post-election slowdown bottomed in late 2016.
- New home sales jumped more than expected in March to a pace 1k shy of current cycle high: Sales in March improved 5.8% MoM versus expectations for a 1.4% pullback. At 621k annualized units, the March pace was just 1k shy of the cycle-high pace set back in June 2016. The previous three months’ (December through February) results were revised up 43k in total. Supply remains tight with 5.2 months’ supply on hand matching the lowest since September 2016.
- Pending home sales slipped 0.8% in March, better than the 1.0% decline expected; February’s 5.5% gain left intact: The number of new contracts signed for the purchase of an existing home fell 0.8% in March after a healthy 5.5% jump in February. The result was 0.2% better than the 1.0% decline expected. Sales fell in three of four regions and the pace of gains in the south slowed. On average, 42% of homes put under contract were done so at a price point above the list price; another data point confirming the tight supply metrics and steady price increases.
Dan Stimpson, CPA
Senior Vice President