FRM Update

November 30, 2020



Highlights


Fed Support

The Fed’s aggregate mortgage buying was $20.8bn in three days last week, a decline from $36.2bn from the previous week because of the scheduled holidays. The most heavily purchased was 30-year UMBS 2.0s and 2.5s with volumes of $8.6bn and $2.9bn, respectively. Gross purchases of MBS have reached over $1.3tn during this round of QE.

The November FOMC minutes showed Fed officials were concerned about a virus surge that could weigh on a moderating recovery and spent considerable time discussing options for altering their asset purchases to boost accommodation. While there was no final decision made, many of the participants want to enhance guidance relatively soon and most favor qualitative outcome-based guidance. This could mean potentially tweaking the duration and/or mix of purchases and tying those purchases to certain economic outcomes. The Fed is currently buying Treasurys and Agency MBS at a combined pace of about $120bn per month.


Current Yield Spreads

Yield spreads on current coupon MBS compared to Treasurys with similar duration were slightly tighter last week. Spreads on 15-year MBS to Treasurys tightened 1 bp to 42 bps, while 30-year MBS tightened 7 bps to 66 bps. Spreads have tightened 23 to 33 bps over the past year.



Trading Activity

The summary below reflects trading activity from last week, which was led by UMBS 20-year 1.5s and 2.0s.

TBA-Eligible Securities:

Non-Deliverable Securities:

Specified Pools:

Given the current outlook on 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 were essentially unchanged last week according to the Bankrate.com survey. The 30-year fixed-rate mortgage remained at 2.95% while the 15-year mortgage rate decreased 1 bp to 2.45%. Mortgage applications for the week ending November 20 rose 3.9% on a 3.5% increase in purchase applications and a 4.5% increase in refis.  The recent downtick in rates and lenders increasing capacity has reignited the wave of purchase and refi activity.



The primary/secondary mortgage spread (average 30-year mortgage rate minus 30-year MBS current coupon) decreased 3 bps last week to 1.51%. The spread has narrowed nearly 50 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

INTENDED FOR INSTITUTIONAL INVESTORS ONLY.
The information included herein has been obtained from sources deemed reliable, but it is not in any way guaranteed, and it, together with any opinions expressed, is subject to change at any time. Any and all details offered in this publication are preliminary and are therefore subject to change at any time. This has been prepared for general information purposes only and does not consider the specific investment objectives, financial situation and particular needs of any individual or institution. This information is, by its very nature, incomplete and specifically lacks information critical to making final investment decisions. Investors should seek financial advice as to the appropriateness of investing in any securities or investment strategies mentioned or recommended. The accuracy of the financial projections is dependent on the occurrence of future events which cannot be assured; therefore, the actual results achieved during the projection period may vary from the projections. The firm may have positions, long or short, in any or all securities mentioned. Member FINRA/SIPC.
Copyright © 2021
Member FINRA/SIPC
This is a publication of Vining-Sparks IBG, L.P.
775 Ridge Lake Blvd., Memphis, TN 38120