October 18, 2021
Current Yield Spreads
The Minutes from the Fed’s September meeting confirmed that officials are warming up to announcing their tapering plans soon. Most officials supported a plan developed by Fed staff that “was designed to be simple to communicate and entailed a gradual reduction in the pace of net asset purchases that, if begun later this year, would lead the Federal Reserve to end purchases around the middle of next year.” The plan would reduce purchases proportionally, Treasury purchases by $10 billion each month and purchases of mortgage-backed securities by $5 billion. If the plan is announced at the November meeting, “the process of tapering could commence with the monthly purchase calendars beginning in either mid-November or mid-December.”
Questions about whether the taper will lead to widening MBS spreads is a common concern among investors. The Fed is currently adding $40bn of MBS to its balance sheet per month, but aggregate buying (including reinvestment) has averaged $114bn per month since May 2020. In the previous tapering cycle the Fed slowed the rate of purchases and then continued to add enough purchases to maintain the size of its balance sheet. If history repeats, the Fed will continue to purchase a significant amount of MBS using proceeds from paydown activity during the tapering process and after its completed for some time. Combine this outlook with a potential contraction in the net issuance of MBS (reduced refi activity) in the coming year and the Fed could continue to be a major tailwind for MBS valuations.
Mortgages outperformed Treasurys for the second consecutive week. Nominal yield spreads on 15-year MBS (1.5s) to Treasurys with similar duration tightened 6 bps to 27 bps, while yield spreads on 30-year MBS (2.0s) tightened by 3 bps to 60 bps.
The summary below reflects customer purchase activity from the previous week. Activity was led by UMBS 20-year 1.5s & 2.0s followed by UMBS 15-year 1.5s. There was also good activity in CRA-related trades as depositories appear to be addressing needs before year-end.
- UMBS 10-year 1.5s & 2.0s
- UMBS 15-year 1.0s & 1.5s (1.5s the most traded)
- UMBS 20-year 1.5s to 2.5s (1.5s the most traded)
- UMBS 30-year 1.5s & 2.5s (2.5s the most traded)
- FNMA 30-year Jumbo 2.0s
- GNMA 15-year Jumbo 2.0s & 2.5s
- Low loan balance pools with a maximum loan amount ranging from $85k to $175k
- Custom CRA Pools
Mortgage Rates and Applications
Mortgage rates were relatively stable last week according to Bankrate’s most recent survey. Both 15- and 30-year rates declined 1 bp to 2.40% and 3.15%, respectively. Rates remain historically low but are currently at the highest levels seen since June.
Mortgage applications for the week ending October 8 inched up 0.2% after falling 6.9% the previous week. Refinance applications fell 0.5% and have declined in four of the past five weeks. On a positive note, purchase applications increased 1.5% but remain down 17% from their January average.
Michael S. Erhardt, CPA
Senior Vice President, Investment Strategies
Vining Sparks IBG, LP