May 29, 2018
MBS yield spreads versus Treasuries widened slightly, as Treasury yields fell across the curve. Mortgage rates fell significantly last week, reversing the trend higher this year. Mortgage applications fell for the fifth consecutive week, as both purchase and refinance applications declined. Refinance activity continues to be historically low and range-bound, falling to the lowest level in 17 years.
- Mortgage yield spreads widened last week.
- 15-year and 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 flattened 5bps from 50bps to 45bps.
- 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 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.
- Fannie Mae and Freddie Mac will launch a Single Security, Uniform Mortgage-Backed Security (UMBS) in 2019. Exchange of eligible securities is possible but not mandatory. Many buy-and-hold investors are not expected to immediately (or ever) undertake an exchange. For most investors, we believe this will largely be a non-event as no action is required on their current holdings, nor does it change anything about the underlying collateral, structure or cash flows of current securities. For additional details, please contact your account representative for our latest Strategic Insight.
- CMO yield spreads versus the Treasury curve held steady overall last week and over the last month.
- Spreads remain relatively wide as compared to similar-duration MBS.
- 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 fell last week, reversing the trend higher this year.
- 15-year mortgage rates fell 11bps to 3.87%, 56bps above the 12-month average of 3.31%.
- 30-year mortgage rates rose 14bps to 4.42%, 42bps above the 12-month average of 4.00%.
- 15-year mortgage rates have increased 67bps in 2018, while 30-year mortgage rates are up 57bps YTD.
- Mortgage applications fell for the fifth consecutive week and have fallen six of the last seven weeks. Applications fell 2.6% for the week ended May 18 driven lower by a 3.7% drop in refinance activity and purchase applications fell 2.0%.
- The MBA Refi Index has declined seven of the last eight weeks, falling 3.7% to 1018, below its 12-month average of 1298. Refinance activity continues to be historically low and range-bound, averaging a low index level of 1176 since the beginning of the year and has been pushed lower by increasing mortgage rates in 2018. Mortgage refinancing in the U.S. has now fallen to the lowest level in 17 years(December 2000).
Existing Home Sales Slowed in April: Sales dropped 2.5% MoM in April, a steeper decline than the 0.9% decrease expected by economists. Despite a seasonal uptick in inventories relative to March levels, available inventory tightened on a YoY basis for the 35th consecutive month. The confluence of those two factors was a higher median sales price of $257.9MM, 5.3% higher than a year ago and the third highest on record.
Momentum of New Home Sales Slows After April’s Data and Revisions: New home sales totaled 662k annualized units in April, short of the 680k pace expected, and the prior three months’ tally was revised down a total of 41k. The 1.5% MoM decline in April was driven entirely by a 7.9% decline in the West, which accounted for just over a quarter of the total month’s sales. Activity in the Midwest and South was essentially flat while sales in the Northeast, the region with the smallest volume, jumped 11.1% after declining 16.3% in March. While the general uptrend remains intact, the momentum to start 2018 looks slower than expected.
Dan Stimpson, CPA
Senior Vice President