May 6, 2019
Yield spreads on current-production MBS to Treasuries were mixed last week, with 15-year tightening 3 bps to 45 bps while 30-year held firm at 72 bps. The recent outperformance to rates is likely a reflection of the low implied volatility, consistent demand, and a presumed decline in refinancing demand. After peaking at 1583 in early April, the MBA Refinance Index has slumped 22%, the result of a slight uptick in mortgage rates.
On Friday morning, Ginnie Mae released a Request for Input regarding a rule change that would restrict pooling into the multi-issuers for VA cash-out loans with LTVs above 90%. Over 60% of VA cash-out loans are currently issued with LTVs above 90%. The proposed restriction is an attempt to curb the repeated mortgage refinancings that often harm both borrowers and investors. A link to the press release can be found here.
Buying activity last week was spread among the various sectors outlined below. There was also decent two-way flow with customers disposing of odd-lots and underperforming positions.
The following represents an overview of the activity last week:
- Nearly every coupon (2.0’s – 4.0’s) was traded. Most of the activity was concentrated in the lower coupons (2.0’s – 3.0’s), and these were mostly seasoned positions targeted by investors seeking less variability in cash flows and lower premiums.
- Most of the activity was in new production higher coupons (3.5’s and 4.5’s) trading in the $102 to $105 range. Another popular trade has been in lower coupons (2.0’s and 2.5’s), often as part of a barbell strategy.
- Demand was largely focused on GN II 4.5’s and 5.0’s. Although this is new production 30-year paper, the projected price volatility is relatively low (ranging from -12.0% to -15.0% with rates up 300 bps), primarily because of the higher coupons and prepayment patterns typically associated with FHA/VA borrowers.
- We have seen continued demand for floating rate structures (Freddie K’s and FN ACES in which the fixed-rate cash flow has been swapped out for floating-rate cash flow). Fixed rate buyers have focused on FN DUS with 7- to 10-year finals.
Mortgage Rates and Refinance Activity
Benchmark mortgage rates ticked up slightly last week. 15-year mortgage rates increased 1 bp to 3.50%, while 30-year mortgage rates rose 5 bps to 4.09%.
Michael S. Erhardt, CPA
Senior Vice President, Investment Strategies
Vining Sparks IBG, LP