October 15, 2019
Yield spreads for current-coupon MBS to Treasurys widened last week as trade optimism drove Treasury yields higher. 30-year MBS widened by 2 bps to 105 bps, while 15-year increased 4 bps to 72 bps. The spread widening has propelled MBS valuations, especially in 15-year pools. 15-year continue to be very compelling versus 30-year (see graph below).
Activity was strong in the second half of the week as investors took advantage of the market sell-off and backup in yield. Demand was solid for all maturities, but newly-issued 20-year 3.0s were the most heavily traded. The following is a list of actively traded sectors and coupons:
- 10-Year 2.5s to 3.5s – Mostly newer production pools.
- 15-Year 2.0s to 4.0s – Trades reflected a wide variety of coupons and a mix of new production and seasoned pools.
- 20-Year 3.0s – Newer production 3.0s continued to trade well, reflecting a pick-up in spread over 3.5s.
- Off-The-Run-Collateral – Buyers seeking higher yields focused on 30-year pools collateralized by non-conforming jumbo loans with 3.0% and 3.5% coupons.
- CMBS – The focus for CMBS (Fannie DUS & Freddie Ks) was on finals in the 5- to 10-year range with lower premiums. This product along with lower-coupon MBS has been a prevalent trade for investors seeking locked-out cash flow, positive convexity, and higher yields.
- CRA Targeted Pools – Traded several MBS pools created for financial institutions seeking eligible credit for compliance with the Community Reinvestment Act.
Mortgage Rates and Refinance Activity
Benchmark mortgage rates increased last week. 15-year mortgage increased 7 bps to 3.19%, while 30-year mortgage rates increased 9 bps to 3.80%.
Mortgage applications for the week ending October 4 rose another 5.2% at mortgage rates fell further, sparking another good week for refinances. Refi apps rose 9.8% but purchase apps pulled back 0.9%. For the third quarter, mortgage rates averaged their lowest quarterly average since 2Q16 and 3Q16. With the average outstanding mortgage rate for all homeowners with mortgages (Federal Reserve data) currently at 3.87%, rates have now fallen sufficiently low to be a catalyst for both purchase and refinance activity.
Michael S. Erhardt, CPA
Senior Vice President, Investment Strategies
Vining Sparks IBG, LP