October 7, 2019
Yield spreads for current coupon MBS to Treasuries were mixed last week as the overall Treasury market continued its run higher in price. 30-year MBS widened by 3 bps to 103 bps, while 15-year held firm at 68 bps.
Yield spreads on mortgage product remain at multi-year highs, making for attractive valuations, especially in 15-year. 15-year have reached some of the cheapest levels versus 30-year in some time (see graph below).
October-released factors indicated that September fixed-rate prepayments increased for 30-year pools for all three agencies but decreased for 15-year pools. This is the seventh increase for 30-years in the past 8 months.
Considering the bond market rally and prepayment report, this may be a good time to clean-up odd lots and underperforming positions. A consistent trade has been to sell seasoned TBA deliverable FNMA/FHLMC 10- and 15-year into the TBA bid. The TBA bid for seasoned pools can result in a negative take-out yield (projected yield to the buyer) to the Treasury curve. The trade works best for coupons ranging from 2.50% to 4.00% with a current weighted-average maturity of 80 months or less.
Activity was strong last week. Investors focused on 15-and 20-year TBA-eligible pools, as well as 30-year pools secured by jumbo loans. The following is a list of actively traded sectors and coupons:
- 10-Year 4.0s – Newer-production pools with relatively low loan balances.
- 15-Year 2.0s to 3.5s – Trades reflected a mix of new-production and seasoned pools.
- 20-Year 3.0s – Newer production 3.0s traded 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 3.5% coupons.
- CMBS – The focus for CMBS (Fannie DUS & Freddie Ks) was on finals in the 5- to 7-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 declined last week. 15-year mortgage fell 9 bps to 3.12%, while 30-year mortgage rates decreased 3 bps to 3.71%. Mortgage applications for the week ending September 27 on a 0.9% increase in purchase apps and a 14.2% jump in refi apps. Purchase applications continue to point to a positive trend for home sales.
Michael S. Erhardt, CPA
Senior Vice President, Investment Strategies
Vining Sparks IBG, LP