November 13, 2018
Yield spreads on current production coupons to Treasuries were mixed for the week. Spreads widened slightly for 30-year MBS and tightened on 15-year MBS. The theme in the MBS market continues to be lower dollar prices and wider spreads relative to the last several years. For example, Freddie 15-year 3.5’s are currently trading at a slight discount, a level unseen since the second quarter of 2011.
October prepayments speeds were announced last week. Prepayments increased for all three agencies, but the increases were only ~20% of the decreases seen in September. There were three extra days in October that likely accounted for the increases. The complete commentary on prepayment speeds can be found here.
Demand continues to focus on seasoned 15- and 20-year passthroughs trading at a discount. The lower coupons generally have better convexity relative to higher coupons and longer WAMs.
The following represents a summary of the activity last week and themes in the overall sector:
- 10-Year 4.0’s – There continues to be strong bank demand in this sector because of the defensive nature of these structures.
- Seasoned 15-year 2.0s to 3.0s – The flat yield curve and relative value in these coupons has driven investors to this segment. There continues to be a relatively small pay up over TBA for pools with seasoning between 18 to 36 months. In some cases, investors can potentially receive less price volatility and greater stability of cash flows relative to new pools, for a modest trade-off in projected yield. Please see a recent Strategic Insight discussing the current merits of slightly seasoned, below par 15-year MBS.
- 20-Year 3.5s – New production 3.5’s are trading at a relatively steep discount and at 46-47 ticks up above 30-yr FNMA 3.5’s. Using street consensus speeds, yields are projected at 75bps over the Treasury curve.
- 30-Year 4.5s – Several trades in new production FNCK pools (Jumbo-conforming loans)
- FNMA DUS and Freddie K’s – The focus for FNMA DUS was on 9- to 10-year finals. Yield spreads on Freddie K’s have widened 3 to 4bps in recent weeks and investors are targeting 5-year finals.
- Non-TBA pools – Activity in off-the-run collateral remained steady with investors buying seasoned FNMA Relocation 30-yr 3.0’s and seasoned HLTV Fannie 20-yr 3.0’s.
MBS pools – The MBS desk routinely creates custom MBS pools to assist financial institutions with the Community Reinvestment Act requirements.
Mortgage Rates and Refinance Activity
- Benchmark mortgage rates moved modestly higher last week (11/9).
- 15-year mortgage rates increased 2bps to 4.13%, 42bps above the 12-month average of 3.71%, and 34bps above the YTD average of 3.79%.
- 30-year mortgage rates increased 3bps to 4.82%, 49bps above the 12-month average of 4.33%, and 42bps above the YTD average of 4.40%.
- 15-year mortgage rates have increased 93bps in 2018, while 30-year mortgage rates are up 97bps YTD.
Mortgage Apps Continue to Decline: Mortgage applications for the week ending November 2 fell 4% from a week earlier and dropped 16% from one year ago. Applications to purchase a home led the volumes lower, declining 5% for the week to the lowest level in two years. Mortgage applications to refinance a home loan have generally been declining for more than a year and fell an additional 3% last week. The refinance share of mortgage activity decreased to 39.1% of total applications, from 39.4% the previous week.
Michael S. Erhardt, CPA
Senior Vice President
Vining Sparks, IBG