November 16, 2020
- The Fed has started shifting its buying away from 30-year UMBS 2.5s to 1.5s
- Yield spreads tightened by 2 to 5 bps as MBS outperformed Treasurys for the third consecutive week on robust volumes
- Investor buying activity was focused on UMBS 20-Year 1.5s and non-deliverable 30-year FNMA Jumbo 1.5s
- Mortgage rates declined 10 to 14 bps last week according to the Bankrate.com survey
- The refi index remains elevated and is 67% higher than one year ago
The Fed’s aggregate mortgage buying last week was $19.6bn. The most heavily purchased was 30-year UMBS 2.0s and 2.5s with volumes of $8.2bn and $2.5bn, respectively. The Federal Reserve will target up to $65.4bn MBS from Nov. 16 to Nov. 30, compared to the last cycle of $61.2bn. Gross purchases of MBS have now reached over $1.2tn during this round of QE.
Current Yield Spreads
Yield spreads on current coupon MBS compared to Treasurys with similar duration were tighter for the third consecutive week. Nominal spreads on 15-year MBS to Treasurys tightened 2 bps to 43 bps and 30-year MBS tightened 5 bps to 73 bps. Spreads have tightened 21 to 25 bps over the past year.
The summary below reflects trading activity from last week, which was led by UMBS 20-Year 1.5s and non-deliverable 30-year FNMA Jumbo 1.5s. Trades consisted primarily of bonds going out to customers, but we’ve also seen depositories selling MBS to monetize unrealized gains to supplement earnings and capital ratios. Quicker-paying TBA-eligible passthroughs are solid candidates for selling due to the level of Fed support.
- UMBS 10-year 1.5s & 2.0s
- UMBS 15-year 1.5s to 2.5s (1.5s the most traded)
- UMBS 20-year 1.5s to 2.5s (1.5s the most traded)
- UMBS 30-year 1.5s to 3.0s (3.0s the most traded)
- FNMA Jumbos 1.5s to 3.0s (1.5s & 3.0s were the most traded)
- 15- and 30-Year 1.5s to 3.0s LLB Pools ($85k -$200k max loan size)
- Custom CRA Pools
Given robust refinance activity, portfolio managers continue to seek prepay protection to avoid potentially low or negative yields. Many investors have turned to specified pools (lower loan balances, NY/FL collateral, investor loans) to help partially mitigate faster prepay speeds. The graph below highlights monthly prepayment speeds on different collateral types.
Prepay Friction – 30-Year 3.0s of 2019
Mortgage Rates and Refinance Activity
Mortgage rates declined meaningfully last week according to the Bankrate.com survey. The 30-year fixed-rate mortgage declined 10 bps to 2.98% while the 15-year mortgage rate decreased 14 bps to 2.48%. Despite record lows on mortgage rates, buyer demand slowed as weekly mortgage applications declined 0.5% from the previous week. Mortgage applications to buy a home declined 3.0% from the previous week but were 16% higher compared to the same week one year ago. The index has decreased in six of the last seven weeks. Lower rates pushed refinance applications higher by 1.0% over the previous week. The refi index is at the highest level since August and 67% higher than the same week one year ago.
The primary/secondary mortgage spread (average 30-year mortgage rate minus 30-year MBS current coupon) decreased 2 bps last week to 1.64%. The current level is 9 bps over the trailing one-year average of 1.55% and 43 bps over the trailing five-year average of 1.21%. The spread has narrowed 33 bps since the beginning of August. Lenders are likely to tighten spreads as Treasury rates backup in order to sustain pipelines.
Michael S. Erhardt, CPA
Senior Vice President, Investment Strategies
Vining Sparks IBG, LP