November 4, 2019
Yield spreads for current coupon MBS to Treasurys tightened last week. 30-year MBS tightened by 7 bps to 100 bps, while 15-year tightened 3 bp to 67 bps. Despite the recent retreat from the wides of the year, MBS valuations remain compelling. 15-year continue to be attractive versus 30-year (see graph below).
The refi index has settled in at near 2000 for the second straight week, which is 25% below the peak level from mid-August. October prepayments, which will be released this week, are likely to show the highest speeds of the year, but the recent pull-back in the refi index may provide some reprieve during November.
Activity was steady last week with a variety of trades in all sectors. The following is a list of actively-traded sectors and coupons:
- 10-Year 2.5s – Heavily-seasoned pools trading near par.
- 15-Year 2.0s to 3.0s – The most prominent trade was in 15-year 2.5s, the current-production coupon. 2.0s are still trading slightly below par, which has improved interest in this coupon.
- 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 below par because of the sell-off. There were also a few trades in 3.5s with investors willing to accept higher premiums for better option-adjusted spread.
- Off-The-Run-Collateral – Buyers seeking higher yields focused on 30-year pools with 3.00% and 3.50% coupons collateralized by jumbo loans.
- CMBS – The focus for CMBS (Fannie DUS & Freddie Ks) was on 4- and 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
Benchmark mortgage rates edged down last week. 15-year mortgage rates declined 1 bp to 3.16%, while 30-year mortgage rates fell 2 bps to 3.75%.
Mortgage applications to buy a home for the week ending October 25 increased 2% and were 10% higher than a year ago. Meanwhile, applications to refinance a mortgage fell 1% for the week, but refinance volume was still 134% higher last week when compared annually.
Michael S. Erhardt, CPA
Senior Vice President, Investment Strategies
Vining Sparks IBG, LP