May 14, 2018
MBS yield spreads versus Treasuries were unchanged to slightly tighter, as Treasury yields rose across the curve from 3-month to 20-year maturities. On a relative basis, activity in mortgage related securities fared very well compared to other sectors last week as mid-week activity was elevated compared to levels experienced this year. Mortgage rates rose last week, continuing the trend higher. Mortgage applications fell for the third consecutive week, as both purchase and refinance applications declined. Refinance activity continues to be historically low and range-bound, driven lower by increasing mortgage rates in 2018.
- The mortgage sector moved more similarly to Treasuries than to the swap curve, though yield spreads versus Treasuries did tighten.
- 15-year MBS yield spreads ended the week 1 to 2bps tighter to Treasuries but widened 1 to 2 bps to swaps.
- 30-year MBS yield spreads ended the week unchanged to 1bps tighter to Treasuries and swaps.
- Curve slope measured by 2- and 10-year Treasuries flattened 1bps from 44bps to 43bps, not far off the cycle low of 41bps seen late last week.
- 15yr MBS with coupons ranging from 2.5% to 3.5% remained popular with banks.
- Several trades in non-TBA pools with loans having various prepayment frictions such as HLTV 15yr 3’s and reperforming pools occurred. Their superior convexity versus TBA pools, limited extension risk, and current cash flow fit many investors internal needs as well as the current term structure and rate environment.
- Steady demand continued for new and seasoned Freddie K’s and DUS with terms of around four to seven years.
- CMO yield spreads versus the Treasury curve held steady overall last week. Spreads remain relatively wide as compared to similar-duration MBS, though they have largely corrected from the sharp widening that occurred a month ago.
- The strongest investor focus in the sector remained on front sequentials backed by 30yr 4% and 4.5% FNMA and FHLMC collateral. Full coupons or tranche coupons trimmed by a modest 0.5% have been the most popular.
Mortgage Rates and Refinance Activity
- Mortgage rates rose last week, continuing the trend higher this year.
- 15-year mortgage rates rose 4bps to 3.88%, 60bps above the 12-month average of 3.28%.
- 30-year mortgage rates rose 1bp to 4.42%, 44bps above the 12-month average of 3.98%.
- 15-year mortgage rates have increased 68bps in 2018, while 30-year mortgage rates are up 57bps YTD.
- Mortgage applications fell for the third consecutive week and have fallen four of the last five weeks (5.8% lower YoY). Applications fell 0.4% for the week ended May 4 driven lower by a 0.6% drop in refinance activity and purchase applications fell 0.2%.
- The MBA Refi Index has declined five of the last six weeks, falling 0.6% to 1098, below its 12-month average of 1308. Refinance activity continues to be historically low and range-bound, averaging a low index level of 1191 since the beginning of the year and has been pushed lower by increasing mortgage rates in 2018.
Dan Stimpson, CPA
Senior Vice President