FRM Update

September 10, 2018

Yields spreads for current production coupon MBS to Treasuries were essentially unchanged for the week.  However, yield spreads are wider by 4-5bps over the past few weeks and have reached close to the widest levels of the year, despite implied volatility remaining stable and prepayments behaving in a tame fashion.  The cheapening trend in 2018 has been meaningful, with yield spreads on 30-year MBS widening by 17bps and spreads on 15-year widening by 13bps.

Investor activity over the previous week was largely focused on seasoned 15- and 20-year MBS with lower coupons trading at a discount.  Seasoned 15-year 3.0s (WAM of ~130) accounted for a sizeable share of total activity with investors taking advantage of a modest pay up for seasoning and predictable cash flow.  10-year MBS issuance has been relatively muted this year and spreads remain somewhat tight.  As a result, we’ve seen certain investors seek highly seasoned 15-year MBS as a substitute.

The August prepayment report was released late last week.  Overall MBS prepayments accelerated slightly during August.  A favorable day count and seasonal factors such as housing turnover pushed prepayments forward into the headwind of slightly higher mortgage rates and their suppressive impact on refinance activity.  The complete commentary can be found here.

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

Mortgage Rates and Refinance Activity


Mortgage Applications: Mortgage applications for the week ending August 31 fell 0.1% on a 0.6% increase in purchase apps and a 1.4% decline in refi apps.  On a 4w/4w moving average basis, purchase apps are now down 11.7% from their peak back in May.

Housing Data Remained Weak in July’s Construction Spending Data: Construction spending rose a below-estimate 0.1% in July and there were offsetting revisions to activity in May and June. Total private construction slipped 0.1% as 1.0% drop in non-residential building offset a 0.6% gain in residential activity. The weakness in the non-residential categories was widespread while the strength in residential was concentrated in a 2.1% gain in home improvement spending. Spending on single family homes dropped 0.3% from June and is down in four of the last five months. Multi-family activity was weaker for a second month, down 0.4% from June. In the public sector, overall construction rose 0.7% on a 0.3% gain in residential activity and a 0.7% gain in the non-residential category.

Michael S. Erhardt, CPA

Senior Vice President

Investment Strategist

Vining Sparks, IBG

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