November 25, 2019
Yield spreads for current-coupon MBS to Treasurys widened slightly last week as the broader market traded in a narrow range. 30-year MBS widened by 2 bps to 100 bps, and 15-year widened 2 bps to 66 bps. The story continues to be one of relative value in MBS, with spreads currently near multi-year highs, due primarily to much lower rates and the resulting increase in supply.
There was solid two-way flow (investors selling and buying) last week. 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.
Activity has been focused on 15- and 20-year lower coupon pools, as well as non-deliverable pools collateralized with jumbo loans. The following is a list of actively-traded sectors and coupons from the previous week:
- 10-Year 3.5s – Newer production pools.
- 15-Year 2.0s to 3.0s – The most prominent trade was in 15-year 2.0s, which are trading below par. There was good activity in higher coupons as well.
- 20-Year 2.5s to 3.5s – Newer production 2.5s & 3.0s continued to be a popular choice with investors seeking yield and lower dollar prices. 20-year 2.5s can be purchased near par.
- Off-The-Run-Collateral – Buyers seeking higher yields focused on 30-year pools (UMBS & GN) collateralized by jumbo loans.
- CMBS – The focus for CMBS (Fannie DUS & Freddie Ks) was on 5- to 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 slipped 2.2% in the week ended November 15 following a strong 9.6% jump the week before. A 7.7% drop in refinancing activity drove the overall decline as purchase applications jumped 6.7% to a 19-week high (since July 5). The weekly gain followed a similarly-solid 5.1% increase two weeks ago and left the purchases index up 7.3% from a year ago. The housing data has improved as mortgage rates have declined through 2019.
Michael S. Erhardt, CPA
Senior Vice President, Investment Strategies
Vining Sparks IBG, LP