May 30, 2017
Activity was light last week in the MBS and CMO sectors impacted by slightly higher prices, curve flattening and a couple basis points of spread tightening between MBS and their Treasury benchmarks, which created just enough uncertainty to keep many portfolio managers on the sidelines last week. Minutes from the Fed’s May meeting suggested a slow shrinking process for their MBS holdings, likely starting later this year. While not set in stone, the MBS portion of their balance sheet would likely shrink at a pace of less than $5 billion a month. The MBS market, and the balance of the bond market, displayed almost no measurable response in terms of prices or yields, trading in a fashion consistent with recent history. (Please see our Strategic Insight, The Intriguing Path of MBS Spreads, for an in depth review.) Mortgage application activity rose 4.4% on a 10.5% increase in refinance apps as mortgage rates declined last week to lowest levels of the year. Housing reports were weaker than expected with new and existing homes sales declining in April. GSE reform may finally be taking shape as Mnuchin said he would consider a federal guarantee on certain mortgage securities, which would kick in after private investors have taken initial losses.
- Mortgage yield spreads were slightly tighter last week:
- 15 and 30-year MBS spreads ended the week 1bps tighter to Treasuries
- 15 and 30-year MBS spreads ended the week 2bps tighter to swaps
- The Treasury curve flattened 2bps last week from 96 to 94bps 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. Depositories were focused on stable structures with 4- to 5-year average lives, especially sequential structures and low balance PACs with 2.5% and 3.0% coupons. Full-coupon front-sequential structures off of 30yr 3.5% collateral (“3.5 squared”) remained popular with financial institutions with wider spreads and better supply than many shorter structures.
Rates and Refis
- Mortgage rates declined last week to the lowest levels this year:
- 15-year mortgage rates fell 8bps to 3.19%
- 30-year mortgage rates fell 7bps to 3.95%
- 15 and 30-year fixed mortgage rates have now fallen 36 and 37bps respectively year-to-date; however; mortgage rates are 30 and 31bps higher than this time last year.
- Mortgage applications for the week ending May 19th rose 4.4%, as purchase apps fell 0.8% and refi apps increased 10.5% after falling 5.7% the prior week. Refi apps remain very low relative to recent history.
Housing and GSE Reform:
New Home Sales Plummet: After setting a 10-year high in March, new home sales plummet 11.4% in April (expected down 1.8%); supply rises from 4.9 to 5.7 months, the highest since September 2015. The number of new homes marks its highest level since July 2009. All four regions declined, but activity was particularly weak in the West, where sales fell 26%. The median home price fell 3.0% MoM and declined 3.8% YoY. The markets did seem to overlook the disastrous results, in part because the data is notoriously volatile on a MoM basis and tends to have large revisions in subsequent months.
Existing Home Sales Fall, While Prices Rise: Existing home sales fell 2.3% in April (expected down 1.1%); FHFA index shows prices rose 6.2% in March from a year ago, same as average 2016 pace. Single family sales dropped 2.4%, while multifamily dropped 1.6%. The biggest drop came from the South where sales fell 120k or 5.0% MoM. The median price of homes sold rose 3.5% during the month. The inventory of existing homes for sale did rise but remain very tight at just 4.2 months of supply.
Home Prices Continue 5% to 6% YoY Growth Rate: The March FHFA home price index showed home prices up 0.6% MoM and 6.2% YoY. Prices in the Pacific and Mountain states continued to grow at the strongest year-over-year pace, while prices in the Northeast have seen the weakest growth. The overall pace of home price gains continues to trend between 5% and 6% driven by low inventory, decent demand, higher construction costs, and low mortgage rates.
GSE Reform Taking Shape Finally (WSJ): Treasury secretary Mnuchin said he would consider a government backstop for the mortgage market. “If there is a guarantee, we would want to make sure that there is ample credit and real risk in front of that guarantee, so that taxpayers are not at risk. These plans would dramatically restructure Fannie and Freddie, and put in place a federal guarantee on certain mortgage securities. This protection would kick in after private investors have taken initial losses through the new ‘credit risk transfer’ market. … Under most of these plans Fannie and Freddie would still exist, but with a more limited role, perhaps as utility-like mortgage guarantors. … The new government guarantee would ensure a steady flow of investment into the trillion-dollar mortgage-backed securities market, keeping mortgage rates low.”
Dan Stimpson, CPA
Senior Vice President