FRM Update

October 15, 2018

Over the past two weeks yield spreads on current production coupons to Treasuries have sharply widened, as spreads have risen to the widest levels seen over the previous two years.  30-year current coupon spreads versus the Treasury curve are approximately 79bps currently, and have widened 9bps from the close on July 25th.

For the second consecutive week, we have observed investors focusing on 15- and 20-year passthroughs with relatively low coupons.  15-year 2.0s (~150 WAM) trading at a deep discount comprised the bulk of trading activity.  These structures are projected to perform well in rising rate scenarios with limited extension risk and stable cash flows.  They are also one of the strongest performers across the coupon stack from a LIBOR OAS perspective.  We also observed consistent demand for seasoned 20-year 3.0’s and 3.5’s from investors seeking slightly higher yields.

The following represents a summary of the activity last week and themes in the overall sector:

Mortgage Rates and Refinance Activity



Mortgage Applications Dropped 1.7% Last Week: Mortgage applications pulled back 1.7% in the week ended October 5 as new purchase activity slowed and fewer existing mortgagors refinanced their current loans. The decline marked the first week out of the last four that saw a slowdown in overall applications. Purchase applications fell 1.1% and eased in both conventional and government mortgage products. Total refinancing slowed 2.6% and was also weaker across both loan types. With the 30-year mortgage rate moving towards 4.75%, the refinanceable share of the universe has collapsed to approximately 6%, according to research by Nomura.


Michael S. Erhardt, CPA

Senior Vice President

Investment Strategist

Vining Sparks, IBG

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