FRM Update

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:




Mortgage Rates and Refinance Activity



Housing:

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

Investment Strategist

Vining Sparks, IBG

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