May 11, 2020
Fed Intervention and Yield Spreads
The Fed has now purchased over $600bn of agency MBS as part of its effort to stabilize the sector. The buying has been focused on the 30-year pools with lower coupons. To put the scale of buying into context, during the sums of QE1 in 2008/2009 and QE3 in 2012/2013, the Fed bought about $1.4tn of mortgages; each of these episodes took over a year to complete. The Fed’s total holdings of agency MBS is estimated to be $2.0tn, which is approximately 30% of the $6.7tn market.
The Fed has been ratcheting down its announced purchases over the past several weeks. The announced daily total of mortgage purchases has been reduced from a peak of ~$50bn/day to ~$6bn/day last week to a planned ~$5bn/day this week.
The historic level of Fed purchases has significantly reduced price and spread volatility in the sector. Prices have been pushed far higher and spreads have narrowed from distressed levels. For example, 2019 Production 30-Year 2.5 MBS have increased in price by approximately 4 points (from $100 to $104) from lows in mid-March. 2019 Production 15-Year 2.0 MBS have increased in price by approximately 3.5 points (from $99.5 to $103) from lows in mid-March.
Nominal spreads for production MBS to Treasurys were wider on a week-over-week basis, with 15-year increasing 2 bps to 75 bps and 30-year increasing 11 bps to 104 bps. Nearly all coupons were wider across the 30-year coupon stack, apart from 30-year 2.0s, which tightened 10 bps. This was related to the Fed as they began buying this coupon last week.
Investor Trading Activity
There was solid two-way flow in trading activity last week with customers buying and selling securities. The major theme in the sector continues to be financial institutions selling TBA-deliverable MBS as the Fed’s massive QE has inflated prices. Reinvestment and new purchase activity have largely been focused what the Fed isn’t buying, including non-deliverable MBS and other sectors with wider spreads.
Since the Fed’s buying program does not include non-deliverable MBS securities, spreads are wider in this space. We’ve seen buying activity in GNMA 15-year pools, and both GNMA (MJM 2.5s to 3.5s) and conventional pools (CK 2.5s to 3.5s) collateralized by jumbo loans. There’s also been steady buying in new-production 15-year 2.0s and 2.5s as well as 20-year 2.0s and 3.0s.
Prepayment speeds were released last week, reflecting refinancing activity in April, and speeds were faster than expected. Fannie and Freddie saw broad increases. Gennie Mae was mixed. Please see here for our complete prepayment commentary, which includes some interesting observations on the primary/secondary mortgage spread.
Mortgage Rates and Refinance Activity
Mortgage rates were mostly stable last week, with 15-year increasing 1 bp to 3.12% and 30-year decreasing 1 bp to 3.51%. Refinance activity decreased 1.7% for the week ending May 1, according to the Mortgage Bankers Association. The index has declined 4 out of the last 5 reports and has dropped 40% since hitting a YTD high on March 6. The purchase index rose 5.8%.
Michael S. Erhardt, CPA
Senior Vice President, Investment Strategies
Vining Sparks IBG, LP