November 13, 2017
Treasury yields rose last week with unchanged to slightly higher mortgage rates and wider mortgage yield spreads versus Treasuries. Mortgage rates were mixed last week and have traded in a tight range over the last month and for much of this year. The MBA Refi Index (1291) has fallen eight of the last nine weeks to the lowest level since February. MBS prepayments increased in October as expected, reversing most of the prior month’s decreases. The two main drivers behind the monthly increases were day count and slightly lower mortgage rates for the applicable rate lock-in period. Prepayments are expected to slow slightly for the month of November. For additional prepayment commentary and charts, please see our October Prepayment Commentary.
- Mortgage yield spreads widened last week:
- 15-year and 30-year MBS yield spreads ended the week 2bp wider to Treasuries and swaps.
- Curve slope measured by 2- and 10-year Treasuries steepened 2bps last week from 72bps to 74bps.
- Investors were active last week in seasoned 15yr MBS, primarily in 3.5% coupons, which offer attractive yields and spreads in the sector.
- Investors were also active in new and seasoned 2.0% and 2.5% 15yr MBS, which offer limited extension risk and discount to par pricing, and in seasoned 30yr MBS with 4% coupons.
- A combination of higher yield versus agency bullets and deference to convexity inspired activity in seasoned multi-family FNMA DUS with 5yr maturities and 7yr maturities yielding approximately 2.5%.
CMO spreads were unchanged to tighter last week. CMO investors were active in various types of CMO structures including front end sequential and PAC structures offering extension protection in conventional, jumbo, and relo collateral. Depositories continue to focus on stable structures with 4- to 6-year average lives. Full coupon front sequential structures off of 30yr 3.5% collateral (“3.5 squared”) remained popular with financial institutions with wider spreads and better supply than many shorter structures.
Mortgage Rates and Refinance Activity
- Mortgage rates were mixed last week and remain in a tight range.
- 15-year mortgage rates rose 3bps to 3.14%
- 30-year mortgage rates fell 1bp to 3.80%
- 15- and 30-year fixed mortgage rates have fallen 10 and 26bps year-to-date; however, mortgage rates are 16 and 3bps higher than this time last year.
- Mortgage applications for the week ended November 3 fell 0.03% to the lowest level since February, driven lower by a decline in refinancing activity (-0.5%), offset by an increase of 0.5% in purchase activity.
- The MBA Refi Index continues to be historically low and range-bound, holding far below levels of 2016. The Index reached a year-to-date high the week ending September 8th at 1637; however, it has fallen eight of the last nine weeks to 1291. The current refi index is below the YTD average of 1354, and is well below the average in 2016 of 2035.
October Prepayment Speeds
MBS prepayments increased in October as expected, reversing most of the prior month’s decreases. The two main drivers behind the monthly increases were day count and slightly lower mortgage rates for the applicable rate lock-in period. Last month’s uptick in mortgage rates should dampen speeds, and no pronounced trend in any direction seems likely based on the current interest rate environment and a housing market that only slowly and bumpily improves. November has the same number of application days as October. Therefore, prepayments should slow slightly for the month of November, reversing the increases of this month. November will mark the sixth month in a row of flip-flopping MBS prepayments, without much change in the long-term trends. For additional prepayment commentary and charts, please see our October Prepayment Commentary.
Dan Stimpson, CPA
Senior Vice President