November 23, 2020
- The Fed has now purchased over $1.3tn of MBS during this round of QE
- Yield spreads on production MBS coupons were largely unchanged last week
- Investor buying activity was focused on non-deliverable 30-year FNMA Jumbo 1.5s and 2.0s, followed by UMBS 15-year 1.5s to 2.5s
- Freddie Mac reported the 30-year mortgage rate dropped from 2.84% to 2.72%, a new record low and 13th record low this year
The Fed’s aggregate mortgage buying last week totaled $36.2bn, or a brisk $7.2bn per day. The most heavily purchased was 30-year UMBS 2.0s and 2.5s with volumes of $13.2bn and $5.5bn, 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 $1.3tn during this round of QE.
Current Yield Spreads
Yield spreads on current-coupon MBS compared to Treasurys with similar duration were unchanged last week. Interestingly there was some dispersion in the 30-year lower coupon stack. Spread changes on 30-year 1.5s, 2.0s, and 2.5s were + 9 bps, unchanged, and -10 bps, respectively. Nominal spreads on 15-year MBS to Treasurys are currently 43 bps and 30-year MBS are 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 non-deliverable 30-year FNMA Jumbo 1.5s and 2.0s, followed by UMBS 15-year 1.5s to 2.5s.
- UMBS 10-year 1.5s & 2.0s
- UMBS 15-year 1.5s to 2.5s (trades nearly equal among coupons)
- UMBS 20-year 1.5s & 2.0s (1.5s the most traded)
- UMBS 30-year 1.5s to 3.0s (3.0s the most traded)
- FNMA 15-year Jumbos 1.5s
- FNMA 30-year Jumbos 1.5s & 2.0s
- 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 slightly last week according to the Bankrate.com survey. The 30-year fixed-rate mortgage declined 1 bp to 2.95% while the 15-year mortgage rate decreased 2 bps to 2.46%. According to the weekly Freddie Mac survey, the average on the 30-year fixed-rate mortgage dropped to 2.72% from 2.84%. This is the lowest level since Freddie Mac began the survey in 1971.
Mortgage applications for the week ending November 13 inched down 0.3% on a 1.8% drop in refi applications. However, refi applications were 98% higher than last year, and refi loans made up approximately 70% of all loan activity. Purchase applications rose an encouraging 3.5%, breaking a streak of week-over-week declines.
The primary/secondary mortgage spread (average 30-year mortgage rate minus 30-year MBS current coupon) decreased 10 bps last week to 1.54%. The spread has narrowed 43 bps since the first week of August. Lenders are likely to tighten spreads further if Treasury rates backup in order to sustain flows.
Michael S. Erhardt, CPA
Senior Vice President, Investment Strategies
Vining Sparks IBG, LP