May 4, 2020
Since mid-March, the Fed has purchased nearly $600bn of agency mortgage-backed securities as part of its effort to stabilize the sector. The buying has been focused on the UMBS 30-year 2.5% and 3.0% coupons. To put the scale of buying into context, during the sums of QE1 in 2008/2009 and QE3 in 2012/2013, the Fed bought about $1.4tn of mortgages; each of these episodes took over a year to complete.
The Fed has been ratcheting down its announced purchases over the past several weeks. The announced daily total of mortgage purchases has been reduced from a peak of ~$50bn/day to a planned $6bn/day this week. Last week’s FOMC statement promised the Fed will continue to purchase agency MBS in amounts needed to support smooth market functioning.
The historic level of Fed purchases has significantly reduced price and spread volatility in the sector. Prices have been pushed far higher and spreads have narrowed from distressed levels. For example, the price of FNMA 30-year 3.00s was approximately $100-20 on March 20, and today these securities are bid near $105-15. Daily price changes of mortgages are down to single-digit ticks instead of points a several weeks ago.
Nominal spreads for MBS to Treasurys were unchanged on a week-over-week basis, with 15-year remaining at 73 bps and 30-year at 93 bps. These levels are 10-25 basis points higher than they were one year ago.
There was decent two-way flow in trading activity last week with customers buying and selling. Financial institutions continue to selectively sell TBA-deliverable securities in order to supplement earnings with gains. Most of the buying has been focused on non-deliverable MBS and other sectors with wider spreads (CMOs, CMBS, Municipals).
The Fed’s buying program does not provide price assistance to non-deliverable MBS securities. Therefore, spreads are wider for GNMA 15-year pools, and both GNMA (MJM 2.5s to 3.5s) and conventional pools (CK 3.0s to 4.0s) collateralized by jumbo loans. There is also steady buying in 20-year 2.0s and 3.0s.
Mortgage Rates and Refinance Activity
Mortgage rates declined slightly last week, with 15-year decreasing 2 bps to 3.11% and 30-year decreasing 4 bps to 3.52%. These rates are near the lowest mortgage rates observed since 2012. Refinance activity decreased 7.3% for the week ending April 24, according to the Mortgage Bankers Association. The index has declined 11 out of 16 reports and has dropped 39% since hitting a YTD high on March 6. On a positive note, purchase applications increased 11.6%. While the rebound was from a very low level, it is still positive to see signs of any activity in purchase applications. Lenders have the primary/secondary spread at 1.86%, well above its trailing one-year average of 1.22%, in order to manage capacity; it hit 2.33% on March 27, the highest in at least a decade.
Michael S. Erhardt, CPA
Senior Vice President, Investment Strategies
Vining Sparks IBG, LP