May 15, 2017
Small price declines and slightly wider spreads between MBS and their Treasury or Agency benchmarks seemed to have created just enough of a value shift to inspire many portfolio managers to act last week. As the week wound down, activity slowed back down. Small yield spread increases occurred consistently across the spectrum of mortgage related products. Small increases in mortgage applications for both refinancing and purchases slightly outpaced impacts of seasonality alone, while conventional mortgage rates increased 1bp and FHA mortgage rates declined 2bp.
- Mortgage yield spreads widened by small amounts last week:
- 15yr and 30yr MBS spreads ended the week 1 to 2bps wider to Treasuries and 2 to 4bps wider to swaps
- Prices declined early in the week and recovered Thursday and Friday.
- What had been a brisk pace of activity with portfolio managers earlier in the week faded rapidly to near nothing by Friday
- Some of the more popular offerings included new 2.5% 15yr pools and moderately seasoned 20yr pools, especially 3.5 coupons
- More activity mid-week and later than early in the week, contrasting with MBS in terms of flows
- Financial institutions of various sizes partially depleted a more limited than usual supply of stable paper from the short end of the curve out to 5.5 years
- Full coupon front sequential structures off of 30yr 3.5% collateral (“3.5 squared”) remained popular with financial institutions with much wider spreads and better supply than many shorter structures
Rates and Refis
- Mortgage rates generally changed marginally last week, based on the Bankrate survey:
- 15yr mortgage rates rose 1bp to 3.13%
- 30yr mortgage rates fell 1bp to 3.93%
- 15-year and 30-year fixed mortgage rates have now fallen 11bps and 13bps respectively year-to-date. They are 42bp and 34bp higher than this time last year.
- Mortgage applications for the week ending May 5th rose 2.4%. Applications to refinance existing mortgages increased 3.3%, comprising 41.9% of all mortgage applications. Purchase applications increased 1.7%.
The fates and futures of the GSEs returned to the financial headlines last week. FHFA Director Mel Watt sounded off a bit to the Senate Housing Committee, saying “I have said repeatedly, and I want to reiterate, that these conservatorships are not sustainable and they need to end as soon as Congress can chart the way forward on housing finance reform” and that “Congress urgently needs to act on housing finance reform.” Based on the terms of the 2008 conservatorship and in keeping with the 2012 amendment to this agreement, FNMA and FHLMC must send their quarterly profits to the U.S. Treasury. This means that next year there will be no capital buffers in place, an outcome that Mr. Watt finds unacceptable. Of this potentiality, he said he may be forced to “unilaterally deal with it, which is something I’d prefer not to do….If the two parties can’t dance, then I may have to dance by myself.” The compromise he seeks with U.S. Treasury Secretary Steven Mnuchin could result in a compromise in the form of curtailment of some of the dividends, retaining them to buffer the capital positions against potential future losses.
At the minimum, this rhetoric should serve to revitalize efforts of overall reform of the GSEs.
Director of Investment Product Strategies