November 5, 2018
There was a considerable increase in fixed-rate MBS activity last week. Investors seemed eager to take advantage of lower dollar prices and wider yield spreads. Yield spreads on 15-year current production coupons to Treasuries widened 4bps, while 30-year current coupon spreads widened 2bps. Spreads on 15-year MBS have doubled during 2018 and are now at a 21-month high.
Activity continues to be focused on 15- and 20-year passthroughs with relatively low coupons. The lower coupons generally have better convexity relative to higher coupons and longer WAMs. Most of the buying continues to be in discounted 15-year paper with coupons ranging from 2.00% to 3.00%. We saw elevated demand for 20-year 3.0’s and 3.5’s last week. This collateral has cheapened relative to 15- and 30-year paper in recent weeks, and offers attractive yields.
There is an interesting dynamic developing in the pricing between Fannie and Freddie 15-year 3.00’s, with Freddie trading at a significant and consistent discount to Fannie (5-6 ticks).
The following represents a summary of the activity last week and themes in the overall sector:
- 10-Year 4.0’s – There continues to be strong bank demand in this sector because of the defensive nature of these structures.
- Seasoned 15-year 2.0s to 3.0s – The flat yield curve and relative value in these coupons has driven investors to this segment. There continues to be a relatively small pay up over TBA for pools with seasoning between 18 to 36 months. In some cases, investors can potentially receive less price volatility and greater stability of cash flows relative to new pools, for a modest trade-off in projected yield. Please see a recent Strategic Insight discussing the current merits of slightly seasoned, below par 15-year MBS.
- 20-Year 3.5s – New production 3.5’s are trading at a relatively steep discount and at 46-47 ticks up above 30-yr FNMA 3.5’s. Using street consensus speeds, yields are projected at 80bps over the Treasury curve.
- 30-Year 4.5s – Several trades in new production FNCK pools (Jumbo-conforming loans)
- FNMA DUS and Freddie K’s – The focus for FNMA DUS was on 9- to 10-year finals. Yield spreads on Freddie K’s have widened 3 to 4bps in recent weeks and investors are targeting 5-year finals.
- Non-TBA pools – Activity in off-the-run collateral remained steady with investors buying seasoned FNMA Relocation 30-yr 3.0’s and seasoned HLTV Fannie 20-yr 3.0’s.
- MBS pools – The MBS desk routinely creates custom MBS pools to assist financial institutions with the Community Reinvestment Act requirements.
Mortgage Rates and Refinance Activity
- Benchmark mortgage rates climbed higher last week (11/2).
- 15-year mortgage rates increased 7bps to 4.11%, 42bps above the 12-month average of 3.69%, and 31bps above the YTD average of 3.80%.
- 30-year mortgage rates decreased 5bps to 4.70%, 39bps above the 12-month average of 4.31%, and 30bps above the YTD average of 4.40%.
- 15-year mortgage rates have increased 91bps in 2018, while 30-year mortgage rates are up 94bps YTD.
Mortgage Apps Continue to Show Impact of Rising Rates: Mortgage applications for the week ending October 26 fell 2.5% WoW on a 1.5% drop in purchase apps and a 3.8% decrease in refi apps. The broader trends of almost-zero refinance apps and weakening purchase apps remains in place.
Construction Spending Revised Higher on Non-Residential Investment, but Residential Spending Continues Trending Lower: Construction spending in September was better than expected thanks to a positive revision to August’s data. August spending was originally reported to have been unchanged for the month, but revisions to non-residential investment in structures helped lift that tally +0.8%. September’s construction spending was unchanged from August’s revised-higher level. Public construction fell 0.9% in September but non-residential spending rose 0.1% and residential construction was up 0.6%. The strength in residential spending came from an 8.7% increase in multi-family projects while single family spending actually fell 0.8% and home improvement rose just 0.1%. While the jump in multi-family alleviated the concerns for a month, the slowing pace of residential construction continues to weigh on growth expectations. Moreover, the positive revision to August’s report should boost 3Q’s GDP total in the first revision.
Michael S. Erhardt, CPA
Senior Vice President
Vining Sparks, IBG