FRM Update

October 9, 2018

The sell-off in the bond market caused yield spreads between current production coupon and Treasuries to widen 5bps for 15-year MBS and 8bps on 30-year MBS.  The improvement in the steepness of the yield curve helped 15-year MBS modestly outperform 30-year MBS.  Yield spreads on 15-year MBS are now at the top end of their YTD range, while spreads on 30-year MBS have set YTD highs.

Trading activity was steady, despite the market volatility, as investors took advantage of lower dollar prices and higher yields.  There was a renewed interest in 15-year 2.0s trading at a deep discount. These structures are projected to perform well in rising rate scenarios with limited extension risk and stable cash flows.

September prepayment speeds were released last week.  There were sizable slowdowns across all coupons, reflecting the combined effects of rising mortgage rates and burnout across the portion of the mortgage population still above market rates and also some important seasonal and technical factors.  Please see the complete prepay commentary here.

The following represents a summary of the activity last week and themes in the overall sector:

Mortgage Rates and Refinance Activity


Weak Residential Construction Weighs on August’s Construction Spending: August’s Construction Spending report disappointed expectations, with spending rising just 0.08% MoM on weak residential and private facilities activity.  Residential construction, making up 42% of total construction activity, dropped 0.8% on declines in every category: single family construction down 0.7%, multi-family construction down 1.7%, and home improvement down 0.6%.  The year-over-year growth of residential construction is now down to +4.1% from a cycle high of +23.8% in early-2013.  On a quarterly basis, the 3Q data now points to a 5% decline in 3Q for residential construction  Private non-residential construction was weighed down by declines in commercial construction, power plants, and manufacturing facilities; now pointing to a 1% decline in non-residential structures investment in 3Q.  Public construction, making up 24% of activity, was the lone bright spot in the August report. Up 2.0% MoM, public construction activity is now up 14.0% YoY, an increase from -7.4% YoY in early-2017.  Construction of highways/streets, sewage/waste, and water supply facilities continued to drive activity higher.  Despite August’s disappointing report, construction spending continues to be led higher by private facilities investment and public spending; housing construction continues to raise concerns.

Michael S. Erhardt, CPA

Senior Vice President

Investment Strategist

Vining Sparks, IBG

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