May 21, 2018
MBS yield spreads versus Treasuries widened, as Treasury yields rose across the curve. Mortgage rates rose significantly last week, continuing the trend higher this year. Mortgage applications fell for the fourth 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.
- Mortgage yield spreads widened last week.
- 15-year MBS yield spreads ended the week 2 to 4bps wider to Treasuries and swaps.
- 30-year MBS yield spreads ended the week 1 to 2bps wider to Treasuries and swaps.
- Curve slope measured by 2- and 10-year Treasuries steepened 7bps from 43bps to 50bps.
- Preference for amortizing products that produce current cash flow and on very liquid products seemed greater than usual, especially among banks.
- 15yr MBS with coupons ranging from 2.5% to 3.5% remained popular with banks.
- Several trades occurred last week in non-TBA pools with loans having various prepayment frictions such as seasoned HLTV 20yr 4’s and Relo 15yr 2.5’s and 30yr 3’s.
- Ongoing multifamily activity in FNMA DUS and Freddie K’s reflects aversion to negative convexity by many portfolio managers, as also the current advantages of pricing off of the 5- to 7-year part of the curve.
- Investors also remain active in uncapped floating rate multi-family bonds, taking advantage of higher yield opportunities in LIBOR rates and attractive floating rate yields.
- 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 .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 10bps to 3.98%, 69bps above the 12-month average of 3.29%.
- 30-year mortgage rates rose 14bps to 4.56%, 57bps above the 12-month average of 3.99%.
- 15-year mortgage rates have increased 78bps in 2018, while 30-year mortgage rates are up 71bps YTD.
- Mortgage applications fell for the fourth consecutive week and have fallen five of the last six weeks (4.5% lower YoY). Applications fell 2.7% for the week ended May 11 driven lower by a 3.8% drop in refinance activity and purchase applications fell 2.1%.
- The MBA Refi Index has declined six of the last seven weeks, falling 3.8% to 1057, below its 12-month average of 1303 (4.5% lower YoY). Refinance activity continues to be historically low and range-bound, averaging a low index level of 1184 since the beginning of the year and has been pushed lower by increasing mortgage rates in 2018.
Housing Starts and Building Permits Fall: April Housing Starts disappointed expectations, falling 3.7% (exp. -0.7%) but March’s figures were revised up from +1.9% to +3.6%. By region, starts were notably weak in the Midwest (-16.3%), the West (-12.0%), and the Northeast (-8.1%), while the South showed a gain of 6.4% driven by a 17% gain in single family starts, the only region to register gains in single family activity. Building permits beat low expectations for April, falling just 1.8% (exp. -2.1%). The trends in permits were similar to those of starts with weakness in the Midwest (-4.4%), the West (-13.2%), and the Northeast (-31.9%). Permits in the South rose 12.0% including a 5% gain in single family and a 29% gain for multi-family.
Home Builder Confidence Rises: The NAHB’s Home Builder Index rose from a revised-lower 68 to 70 in April, the first monthly improvement this year and only four points shy of a nearly two-decade high from last December. While construction costs and rising mortgage rates should serve as headwinds for demand, the NAHB’s Chief Economist said, “Tight housing inventory, employment gains and demographic tailwinds should continue to boost demand for newly-built single-family homes. …With these fundamentals in place, the housing market should improve at a steady, gradual pace in the months ahead.”
Dan Stimpson, CPA
Senior Vice President