November 9, 2020
- Yield spreads tightened by 5 to 6 bps as MBS outperformed Treasurys for the second consecutive week
- Buying activity was focused on non-deliverable 30-year FNMA Jumbo 1.5s and 2.0s followed by UMBS 15-year 2.0s and 2.5s
- Financial institutions continued to harvest gains by selling quick-paying TBA-eligible passthroughs
- Mortgage rates remain near record lows, which has the refinance index up 88% compared to the same week one year ago
- Latest prepayment report showed a broad increase in prepayments during October
The Fed’s aggregate mortgage buying last week was $32.2bn. The most heavily purchased was 30-year UMBS 2.0s and 2.5s with volumes of $16.0bn and $4.3bn, respectively. Gross purchases of MBS have now reached $1.23tn during this round of QE.
Current Yield Spreads
Yield spreads on current-coupon MBS compared to Treasurys with similar duration were tighter for the second consecutive week. Nominal spreads on 15-year MBS to Treasurys tightened 5 bps to 45 bps and 30-year MBS tightened 6 bps to 78 bps. Lower coupons, the focus of the Fed buying, continue to outperform higher coupons.
The summary below reflects trading activity from last week, which was led by non-deliverable 30-year FNMA Jumbo 1.5s and 2.0s followed by UMBS 15-year 2.0s and 2.5s. Trades consisted primarily of bonds going out to customers, but we’ve also seen depositories selling MBS to monetize unrealized gains to supplement earnings and capital ratios. Quicker-paying TBA-eligible passthroughs are solid candidates for selling due to the enormous level of Fed support.
- UMBS 10-year 1.5s
- UMBS 15-year 1.5s to 3.0s (2.0s the most traded)
- UMBS 20-year 1.5s to 2.5s (1.5s the most traded)
- UMBS 30-year 1.5s to 3.0s (1.5s the most traded)
- FNMA Jumbos (FNCK 1.5s to 3.0s)
- 15- and 30-Year 1.5s to 3.0s LLB Pools ($85k -$200k max loan size)
- Custom CRA Pools
Given robust 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 relatively stable last week and continue to hover near record lows. The 30-year fixed-rate mortgage remained at 3.06% while the 15-year mortgage rate decreased 1 bp to 2.62%, according to Bankrate.com. Weekly mortgage applications increased 3.8% for the week ending October 30. The refinance index increased 6.4% from the previous week and was 88% higher than the same week one year ago. The purchase index decreased 2.9% from the previous week and was 25% higher than the same week one year ago.
The latest prepayment release, that reported activity in October, showed that speeds continued to increase. At a high-level, conventional speeds increased 2-4 CPR while GNMA saw non-jumbo collateral increase 1-2 CPR and jumbo collateral increase 4-5 CPR. These increases may appear to be modest, but the base was already elevated. In aggregate, UMBS 30-year 2.5s to 4.0s are paying at 40 CPR, the quickest pace since 2004. Please see here for our complete Mortgage Prepayment Commentary.
The primary/secondary mortgage spread (average 30-year mortgage rate minus 30-year MBS current coupon) increased 6 bps last week to 1.66%. The current level is 11 bps over the trailing one-year average of 1.55% and 45 bps over the trailing five-year average of 1.21%. The spread has narrowed 31 bps since the beginning of August. Lenders are likely to tighten spreads as Treasury rates backup in order to sustain pipelines.
Michael S. Erhardt, CPA
Senior Vice President, Investment Strategies
Vining Sparks IBG, LP