October 1, 2018
Yield spreads for current production coupons to Treasuries were mostly unchanged for 15-year MBS and 1bp tighter on 30-year MBS. Benchmark yields were largely stable, after marching higher for most of the month. Implied volatility declined to levels not seen since 2007, which was supportive of the MBS performance over the past week.
Trading activity slowed last week, with investors seemingly trying to digest a fair amount of economic data while waiting on a Fed decision and updated guidance. Most of the activity centered on both seasoned and new production 15-year paper, as well as newer production 20-year 3.0s and 3.5s. The following represents a summary of the activity last week and themes in the overall sector:
- 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.
- 15-Year 4.0s and 4.5s – 15-Year 4.0s are trading at relatively low premiums (~$102) and offer a projected yield spread to Treasuries of approximately 50bps (in the base case at Bloomberg median speeds).
- 20-Year 3.0s and 3.5s – Pay ups in this sector have recovered from their lows in early September, with solid demand from investors.
- Seasoned 20-Year 3.0s and 4.0s – Seasoned pools with WAMs ranging from 180-200, an alternative to new issue 15-year MBS with higher premiums.
- FNMA DUS and Freddie K’s – The focus for FNMA DUS has been on 7-year finals while demand for Freddie K’s has been on the 3- to 5-year part of the curve.
Mortgage Rates and Refinance Activity
- Benchmark mortgage rates pulled back slightly on the week (9/28).
- 15-year mortgage rates decreased 4bps to 3.93%, 34bps above the 12-month average of 3.59%, and 18bps above the YTD average of 3.75%.
- 30-year mortgage rates declined 9bps to 4.57%, 35bps above the 12-month average of 4.22%, and 21bps above the YTD average of 4.36%.
- 15-year mortgage rates have increased 73bps in 2018, while 30-year mortgage rates are up 72bps YTD.
Mortgage applications for the week ending September 21 rose 2.9% on a 2.6% increase in purchase applications and a rare 3.2% increase in refi apps, despite mortgage rates ticking up approximately 20 bps from the end of August through the end of September. Backing away from the week-over-week data, refi apps remain very low and purchase apps are struggling to regain their pace from early-2018.
New Home Sales Beat Expectations for a Change, But Previous Data Revised Lower: August’s New Home Sales report showed sales up a better-than-expected 3.5% MoM. However, the annualized pace of sales rose to just 629k which was 1k worse than expectations. May, June, and July’s sales figures were revised lower than previously reported causing the weaker result. The new home sales data show an even weaker summer for new home sales, adding to the recent run of disappointing housing data. Nonetheless, the uptick in August’s sales at least offers some solace.
Yet Another Disappointing Home Sales Report: The August Pending Home Sales report, released Thursday morning, was yet another disappointment. Sales fell 1.8% MoM versus expectations of a 0.5% decline. On a year-over-year basis, pending sales are now down 2.3%. Pending home sales are collected through a survey of realtors and real estate professionals, tabulating the number of existing homes which have gone under contract for sale but not yet closed. According to the National Association of Realtors, 80% of pending home sales go to closure within two months of contract signing. Pending sales currently point to existing home sales dropping another 2% in coming months.
Michael S. Erhardt, CPA
Senior Vice President
Vining Sparks, IBG