May 22, 2017
Activity faded in the MBS and CMO sectors as the week progressed and Treasuries rallied. Higher prices, curve flattening and slightly tighter spreads between MBS and their Treasury benchmarks seemed to create just enough uncertainty to keep many portfolio managers on the sidelines last week. Mortgage application activity and mortgage rates declined last week. Housing data has shown results that mirror the larger economic trend – improving confidence, but weaker activity.
- Mortgage yield spreads were unchanged to slightly tighter last week:
- 15-year MBS spreads ended the week unchanged to 1bps tighter to Treasuries and swaps
- 30-year MBS spreads ended the week 2 to 3bps tighter to Treasuries and swaps
- The Treasury curve flattened 7bps last week from 103 to 96bps between 2 and 10 year Treasuries; the flattest curve since October 2016
Trading activity in CMOs was also light last week as the availability of specific structures continues to limit activity with issuance remaining quite weak and finding specific structures to match inquiries remains a challenge. Depositories were focused on stable structures with 4- to 6-year average lives, especially sequential structures. Full coupon front sequential structures off of 30yr 3.5% collateral (“3.5 squared”) remained popular with financial institutions as these types of structure have wider spreads and are in better supply than many shorter structures
Rates and Refis
- Mortgage rates declined last week:
- 15-year mortgage rates fell 2bps to 3.27%
- 30-year mortgage rates fell 3bps to 4.02%
- 15-year and 30-year fixed mortgage rates have now fallen 28bps and 30bps respectively year-to-date. Mortgage rates are 46bp and 44bp higher than this time last year.
- Mortgage applications for the week ending May 12th fell 4.1%, as purchase apps fell 2.7% and refi apps dropped 5.7%. On a 4-week moving average basis, purchase apps continue to trend very positively higher. Refi apps, however, remain very low relative to recent history. The improving trend for purchase apps continues to be one of the positive indicators for new housing activity.
Housing: The housing data has shown results that mirror the larger economic trend – improving confidence, but weaker activity.
Homebuilder Confidence Remains High: Prospective buyer traffic eased in the May NAHB Housing Market Index, but a 12-year high for future sales expectations helped push the headline index to the second-best level since June 2005.
New Housing Data Weighed Down by Weak Multi-Family Activity: Housing starts and building permits unexpectedly declined in April and showed big misses relative to estimates; single-family starts were steady up 0.4% in April and increased 8.9% YOY, but single-family permits dropped 4.5%, the biggest monthly decline since February 2015.
Dan Stimpson, CPA
Senior Vice President