November 30, 2020
- November FOMC meeting minutes show many of the participants want to enhance guidance for asset purchases relatively soon to boost accommodation
- Yield spreads on production MBS coupons tightened 1 to 7 bps last week
- Investor buying activity was led by UMBS 20-year 1.5s and 2.0s, followed by non-deliverable Jumbo FNMA 15-year 1.5s
- 30-year mortgage rates remained at a record low 2.95% last week
- The refi index increased 4.5% last week, the highest level since April, and has been buoyed by lenders gradually increasing capacity as the primary/secondary mortgage spread has declined nearly 50 bps since August
- The mortgage universe remains deeply in-the-money to refinance as J.P. Morgan estimates that at a 3.00% rate, 80% of conventional 30-year mortgage borrowers have 50 bps or more of incentive
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.
The summary below reflects trading activity from last week, which was led by UMBS 20-year 1.5s and 2.0s.
- UMBS 10-year 1.5s
- UMBS 15-year 1.5s to 2.5s (2.0s most traded)
- UMBS 20-year 1.5s to 3.0s (2.0s most traded)
- UMBS 30-year 1.5s to 3.0s (1.5s 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 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