May 8, 2017
Activity in MBS picked up during the course of last week as economic data and the market was able to move past the FOMC announcement and a very heavy economic calendar. Yield spreads in 15yr and 30yr fixed MBS tightened to both Treasuries and swaps last week. Mortgage rates were generally unchanged last week with the 30yr rate falling only 1bp. Mortgage applications fell 0.1% led by an increase in purchase applications, while refinance applications fell and remain low. MBS prepayment speeds in April slowed, reversing direction from the previous month’s increase. The April slowdown was the seventh decline in prepayment speeds in the last eight months. While prepays are expected to increase MoM in May due to an increase in day count, such an increase does not indicate a significant change in refinancing trends.
- Mortgage yield spreads tightened last week:
- 15yr and 30yr MBS spreads ended the week 2 to 4bps tighter to Treasuries and 1 to 2bps tighter to swaps
- Slow and small intraday price changes occurred, with 15yr MBS only covering a 10/32nd range during the entire week
- Seasoned 30yr and seasoned 20yr pools continued their popularity partially because of the spread opportunity relative to their durations and also due to low 15yr MBS issuance
Trading activity in CMOs picked up last week, as the lack of any anxiety causing data or Fed rhetoric concurred with slightly lower prices. While unavailability of some specific structures continued to limit participation, some secondary offerings last week aligned nicely with portfolio objectives for other investors. And while issuance remains quite weak, the variety of structures brought to market seemed more in line with investor inquiries. Stabilizing prepayment speeds result in more stable bonds and the trend in that direction seems very likely to continue, promoting this sector.
Rates and Refis
- Mortgage rates were generally unchanged last week
- 15yr mortgage rates were unchanged at 3.27%
- 30yr mortgage rates fell 1bp to 4.02%
- 15-year and 30-year fixed mortgage rates have now fallen 28bps and 30bps year-to-date; however, mortgage rates are up 39bps and 45bps post-election, respectively.
- Mortgage applications for the week ending April 28 fell 0.1% as refi apps fell 4.7%. However, purchase applications rose a solid 4.2% continuing the trend of reasonable housing data.
April Prepayment Speeds
MBS prepayment speeds in April slowed, reversing direction from the previous month’s increase that was caused by a combination of technical and seasonal factors. The April slowdown was the seventh decline in prepayment speeds in the last eight months and with a few exceptions, speeds were lower all across the coupon stack. Market expectations were in line with these estimates, resulting in no surprises for investors or markets. While prepays are expected to increase MoM in May due to an increase in day count, such an increase does not indicate a significant change in refinancing trends. For additional prepayment commentary and charts, please see our Prepayment Commentary.
Construction Spending Pulls Back Fractionally in March: Construction spending for the month of March followed the trends seen in other weather-dependent data, a weaker-than-expected month but coming on the heels of a stronger-than-expected February. February’s construction spending was revised up from +0.8% growth to +1.8% while activity in March pulled back 0.2% MoM. Residential construction rose 1.2% in March including a 0.3% MoM gain in single family activity and a 2.0% gain in multi-family activity.
Dan Stimpson, CPA
Senior Vice President