November 12, 2019
Yield spreads for current coupon MBS to Treasurys tightened last week. 30-year MBS tightened by 4 bps to 96 bps, while 15-year tightened 6 bp to 61 bps. Despite the modest tightening, MBS valuations remain compelling compared to levels seen over the last several years.
The tepid demand for Treasurys and sell-off resulted in robust activity in the MBS sector, with broad based buying from investors taking advantage of lower dollar prices and new yield opportunities. The 15- and 20-year sectors continued to garner a healthy amount of demand, but we also saw strong buying in 30-year non-deliverable collateral (jumbo loans, relocation loans).
November factors were released last week, and we saw prepayment speeds increase once again. This was largely expected given lower mortgage rates and two more business days in October. A complete recap of our MBS prepayment commentary can be found here.
The following is a list of actively traded sectors and coupons from the previous week:
- 10-Year 2.5s & 4.0s – Newer production pools.
- 15-Year 2.0s to 3.0s – The most prominent trade was in 15-year 2.0s, which are trading below par. There was good activity in higher coupons as well.
- 20-Year 2.5s to 3.5s – Newer production 2.5s & 3.0s continued to be a popular choice with investors seeking yield and lower dollar prices. 20-year 2.5s can be purchased below par because of the sell-off. There were also a few trades in 3.5s with investors willing to accept higher premiums for better option adjusted spread.
- Off-The-Run-Collateral – Buyers seeking higher yields focused on 30-year pools with 2.50% and 3.50% coupons collateralized by jumbo loans.
- CMBS – The focus for CMBS (Fannie DUS & Freddie Ks) was on 3- to 10-year finals. This sector has been well-liked by investors seeking locked-out cash flow, positive convexity, and higher yields.
- CRA Targeted Pools – Traded several MBS pools created for financial institutions seeking eligible credit for compliance with the Community Reinvestment Act.
Mortgage Rates and Refinance Activity
The Treasury market sell-off pushed benchmark mortgage rates higher last week. 15-year mortgage rates increased 8 bps to 3.24%, while 30-year mortgage rates rose 6 bps to 3.81%.
Mortgage applications were essentially flat last week as a recovery in refinancing activity offset a slowdown in paperwork for new purchases. Interest in refinancing rose 1.8% while purchase applications pulled back 2.5%.
Michael S. Erhardt, CPA
Senior Vice President, Investment Strategies
Vining Sparks IBG, LP