FRM Update

October 7, 2019


MBS

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:

 

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

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