November 2, 2020
The Fed’s aggregate mortgage buying last week was $28.2bn. The most heavily purchased was 30-year UMBS 2.0s and 2.5s with volumes of $13.2bn and $4.2bn, respectively. As expected, the Fed began purchasing conventional 30-year 1.5s last week. Gross purchases of MBS have now reached $1.2tn during this round of QE.
Current Yield Spreads
Yield spreads on current-coupon MBS compared to Treasurys with similar duration were slightly tighter last week. Nominal spreads on 15-year MBS to Treasurys tightened 2 bps to 50 bps and 30-year MBS tightened 5 bps to 84 bps. Yields spreads widened 10 to 12 bps during the month of October.
Prepayment risk is the primary concern for MBS investors as prices remain high. To help mitigate prepayment risk, MBS buyers have favored lower coupons and pools with characteristics that dampen prepayments (low loan balances, 100% NY, 100% FL, low FICOs, investor loans).
The summary below reflects trading activity from last week, which was led by 1.5s coupons consisting of UMBS 30-year 1.5s and 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.
- UMBS 10-year 1.5s
- UMBS 15-year 1.5s to 3.5s (1.5s the most traded)
- UMBS 20-year 1.5s to 2.5s
- UMBS 30-year 1.5s to 3.0s (1.5s the most traded)
- FNMA Jumbos (FNCK 1.5s to 3.5s)
- 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.
Mortgage Rates and Refinance Activity
A modest increase in the primary/secondary mortgage spread and higher Treasury yields sent mortgage rates slightly higher last week. The 30-year fixed-rate mortgage increased 3 bps to 3.06% while the 15-year mortgage rate increased 5 bps to 2.63%, according to Bankrate.com. Mortgage applications for the week ending October 23 rose 1.7% and refi apps increased 2.5%. The refi index is 80% higher year-over-year. On the purchase side, apps inched up 0.2%, ending a four-week run of declining activity.
The primary/secondary mortgage spread (average 30-year mortgage rate minus 30-year MBS current coupon) increased 4 bps last week to 1.60%. The current level is 5 bps over the trailing one-year average of 1.55% and 39 bps over the trailing five-year average of 1.21%. Therefore, mortgage rates could still fall if we see a reversion in the primary/secondary spread, even if Treasury yields remain stable.
Michael S. Erhardt, CPA
Senior Vice President, Investment Strategies
Vining Sparks IBG, LP