May 7, 2018
MBS and CMO yield spreads versus Treasuries were stable last week. Mortgage rates were unchanged after rising each week during the month of April to the highest levels in over four years. Mortgage applications fell 2.5% for the week ended April 27 driven lower by a 3.5% drop in refinance activity.
- Mortgage yield spreads were stable last week.
- 15-year and 30-year MBS yield spreads ended the week generally unchanged to +/-1bp to Treasuries and swaps.
- Curve slope measured by 2- and 10-year Treasuries flattened from 47 to 45bps, not far off the cycle low of 43bps on April 17th.
- 15yr MBS with coupons ranging from 2.5% to 3.5% remained popular with banks, with the better activity in the mid to latter part of the generally quiet week.
- Several trades in non-TBA pools with loans having various prepayment frictions, such as HLTV and reperforming pools, occurred. Their superior convexity versus TBA pools, limited extension risk, and current cash flow fit many investors’ internal needs as well as the current term structure and rate environment.
- Steady demand continued for Freddie K’s and DUS with terms of 5.5 to around seven years.
- April MBS prepayments fell slightly versus the prior month, a surprise for many market watchers and participants, most of whom predicted a slight increase for the month. Thirty-year and fifteen-year FNMA MBS slowed 3% and 1%, while FHLMC MBS remained unchanged to slightly higher, +2%, respectively. GNMA I MBS dropped -6% for thirty years while remaining almost unchanged for fifteen years. GNMA II MBS posted decreases of 5% and 3% for thirty and fifteen years, respectively. Please see our Prepayment Commentary.
- CMO yield spreads versus the Treasury curve held steady overall last week. Spreads remain relatively wide as compared to similar-duration MBS, though they have largely corrected from the sharp widening that occurred three weeks ago.
- 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 0.5% have been the most popular
- A resurgence of the popularity of VADM structures seems to be occurring, though increased availability of tranches with varying collateral and coupons might be the primary cause of renewed interest.
Mortgage Rates and Refinance Activity
- Mortgage rates were stable last week after rising each week during the month of April to the highest levels in over four years.
- 15-year mortgage rates were unchanged at 3.85%, 59bps above the 12-month average of 3.26%.
- 30-year mortgage rates fell 1bp to 4.42%, 45bps above the 12-month average of 3.97%.
- 15-year mortgage rates have increased 65bps in 2018, while 30-year mortgage rates are up 57bps YTD.
- Mortgage applications fell 2.5% for the week ended April 27 driven lower by a 3.5% drop in refinance activity and purchase applications fell 1.6% after being unchanged the prior week.
- The MBA Refi Index fell 3.5% to 1105, below its 12-month average of 1312. Refinance activity continues to be historically low and range-bound, averaging a low index level of 1196 since the beginning of the year and has been pushed lower by increasing mortgage rates in 2018.
- Construction spending dropped 1.7% in March, disappointing relative to the 0.5% gain expected; however, the prior two months were revised up and more than made up for the miss in March. Both single family and multi-family activity slowed in the private sector and home improvement spending cooled 8.0%, the most of the cycle, but likely reflected payback after a couple of strong months of activity.
- Pending home sales remained positive in March, although the recent trend is slightly weaker than expected; the NAR said tight inventories remained a notable headwind.
Director of Investment Product Strategies
Dan Stimpson, CPA
Senior Vice President