November 18, 2019
Yield spreads for current coupon MBS to Treasurys widened last week. 30-year MBS widened by 2 bps to 98 bps, while 15-year widened 3 bp to 64 bps. MBS valuations remain compelling compared to levels seen over the last several years and to other sectors such as tax-exempt municipals and corporates that have experienced spread tightening during 2019.
Despite the holiday-shortened week, we saw broad based activity in the MBS sector. There was an acceleration of two-way flow (investors selling and buying). The selling has been spurred on by financial institutions preparing balance sheets for year-end and positioning portfolios for improved performance. The steepening yield curve has resulted in stronger bids for shorter paper and buying opportunities on the intermediate portion of the curve.
The following is a list of actively traded sectors and coupons from the previous week:
- 10-Year 2.0s – New-production pools selling below par.
- 15-Year 2.0s to 3.0s – The most prominent trade was in 15-year 2.0s, which are trading below par.
- 20-Year 2.5s to 3.0s – Newer production 2.5s & 3.0s remain a popular choice with investors seeking yield and lower dollar prices. 20-year 2.5s can be purchased near par.
- Off-The-Run-Collateral – We saw the most activity within this space last week. Buyers seeking higher yields focused on 30-year 3.0s and 3.5s collateralized by jumbo loans. There was solid demand for conventional collateral (FNCKs) as well as GNMA paper.
- CMBS – The focus for CMBS (Fannie DUS & Freddie Ks) was on 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
Mortgage applications for the week ending November 8 jumped 9.6% on a 5.1% increase in purchase apps and a 12.9% gain in refi apps. Mortgage rates inched higher during the reference week, with the 30-year rate up from 3.75% to 3.81% and the 15-year up from 3.16% to 3.24%.
Michael S. Erhardt, CPA
Senior Vice President, Investment Strategies
Vining Sparks IBG, LP