October 28, 2019
Yield spreads for current coupon MBS to Treasurys were mixed last week. 30-year MBS widened by 2 bps to 107 bps, while 15-year tightened 1 bp to 70 bps. MBS valuations remain compelling as spreads are currently near the top of the range observed this year. 15-year continue to be attractive versus 30-year (see graph below).
Activity was strong last week as investors continued to take advantage of compelling MBS valuations. Newly issued 20-year 2.5s and 3.0s were the most heavily traded. The following is a list of actively traded sectors and coupons:
- 10-Year 2.0s – Newer-production pools trading near par.
- 15-Year 2.0s & 3.0s – Trades reflected almost a 50/50 split between 2.0s and 3.0s. 2.0s have declined in price to slightly below par, which has stimulated activity.
- 20-Year 2.5s & 3.0s – Newer-production 2.5s & 3.0s continued to be a popular choice with investors seeking yield and lower dollar prices. 20-year 2.5s can be purchased below par because of the sell-off.
- Off-The-Run-Collateral – Buyers seeking higher yields focused on 30-year pools collateralized by jumbo loans and relocation loans. Most of the activity was concentrated in relocation loan pools with a 2.5% coupon, trading at a discount.
- 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 were mostly stable last week. 15-year mortgage held firm at 3.19%, while 30-year mortgage rates fell 2 bps to 3.78%.
Mortgage applications for the week ending October 18 fell 11.9% as purchase apps fell 3.6% and refi apps dropped 17.1%. Removing some of the week-over-week volatility, the 4-week moving average for purchase applications fell 1.9% but remains near the middle of 2019 range. The 4-week moving average for refinance applications remains 132% above its 2018 average.
Michael S. Erhardt, CPA
Senior Vice President, Investment Strategies
Vining Sparks IBG, LP