May 13, 2019
Yield spreads on current production MBS to Treasuries widened last week, with 15-year widening by 5 bps to 50 bps, while 30-year pushed higher by 4 bps to 76 bps. The cheapening trend can be attributed to seasonal supply factors and the release of prepayment speeds early in the week. May-released factors indicated that mortgages saw a broad-based increase in prepayment speeds during April. Speeds increased for the third month in a row for all three agencies. The Vining Sparks Prepayment Commentary can be found here.
Buying activity last week was spread among the various sectors outlined below. Swap activity remained elevated as there was strong two-way flow with investors disposing of underperforming positions.
The following represents an overview of the activity last week:
- Most coupons (2.0’s – 4.5’s) were traded last week. The majority of the activity was in higher coupons (3.5’s and 4.5’s) trading in the $103 to $105 range. There were a few institutions focusing on lower coupons that are projected to perform well if interest rates continue their decline.
- Activity was split almost evenly among newer production coupons (2.5’s and 3.5’s). We have also seen strong demand for highly-seasoned (180 WAM) 2.5’s due to the projected stability of cash flows.
- Demand continues to be focused on GN II 4.5’s and 5.0’s. Although this is new production 30-year paper, the projected price volatility is relatively low, primarily because of the higher coupons and prepayment patterns typically associated with FHA/VA borrowers.
- We have seen continued demand for floating rate structures (Freddie K’s and FN ACES in which the fixed-rate cash flow has been swapped out for floating-rate cash flow). Fixed rate buyers have focused on FN DUS with 7- to 10-year finals.
Mortgage Rates and Refinance Activity
Benchmark mortgage rates declined last week. 15-year mortgage rates decreased 3 bps to 3.47%, while 30-year mortgage rates fell 4 bps to 4.05%, just above its lowest level since early 2018 (3.87%) and far from the peak back in November (4.82%).
Mortgage applications rose 2.7% last week, breaking a four-week stretch of weakness that persisted throughout the month of April. The report had positive implications for home buying activity as a 4.2% gain for purchases was responsible for the lion’s share of the weekly gain, and nudged the purchase index back near its best levels of the cycle. Refinancing activity picked up by a more modest 0.8%, the first weekly gain since March. Lower rates are expected to combine with slower price gains to keep housing activity stable in the months ahead.
Michael S. Erhardt, CPA
Senior Vice President, Investment Strategies
Vining Sparks IBG, LP