October 19, 2020
The Fed’s aggregate mortgage buying last week was $21.2bn. The most heavily purchased was 30-year UMBS 2.0s and 2.5s with volumes of $10.0bn and $4.8bn, respectively. The newest schedule shows the Fed will target $58bn in purchases from October 15 to October 28. 30-year UMBS 1.5s are not included in the planned purchases.
Current Yield Spreads
Yield spreads on production-coupon MBS compared to Treasurys with similar duration widened last week on higher levels of supply. Nominal spreads on 15-year MBS to Treasurys widened 5 bps to 53 bps and 30-year MBS widened 2 bps to 85 bps.
Prepayment risk is the primary concern for MBS investors as prices remain high from Fed action to support borrowers.
To help mitigate prepayment risk MBS buyers have favored lower coupons and pools with characteristics that dampen prepayments (low loan balances, 100% NY, 100% FL, low FICOs, investor loans).
The summary below reflects trading activity from last week. We’ve also seen selling of MBS to monetize unrealized gains with some repositioning into lower coupons and/or other collateral with prepayment friction. Selling seasoned TBA-eligible MBS remains attractive due to high prepayment speeds and significant Fed support of pricing.
- UMBS 10-year 1.5s & 2.0s
- UMBS 15-year 1.5s to 3.0s (1.5s the most traded)
- UMBS 20-year 1.5s to 2.5s
- UMBS 30-year 1.5s to 2.5s (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.
Mortgage Rates and Refinance Activity
The 30-year fixed-rate mortgage increased 1 bp to 3.04% while the 15-year mortgage rate increased 2 bps to 2.57%, according to Bankrate.com. In a separate survey by Freddie Mac, which includes points/fees, the 30-year rate decreased 6 bps to 2.81%, another record low and tenth record this year.
Mortgage applications for the week ending October 9 fell 0.7% despite mortgage rates declining to a new record low. Purchase applications fell 1.6% while refi apps inched down 0.3%. The refi index remains elevated and is 44% higher than one year ago.
The primary/secondary mortgage spread (average 30-year mortgage rate minus 30-year MBS current coupon) dropped 7 bps last week to 1.60%. The current level is 9 bps over the trailing one-year average of 1.51% and 40 bps over the trailing five-year average of 1.20%. Therefore, mortgage rates could still fall 25 to 40 bps if we see a reversion in the primary/secondary spread.
Michael S. Erhardt, CPA
Senior Vice President, Investment Strategies
Vining Sparks IBG, LP