September 17, 2018
Yields spreads for current production coupon MBS to Treasuries tightened a couple of basis points this past week, as the overall bond market trended higher in yield for the second consecutive week. Valuations continue to remain near their highs for the year despite the modest tightening. The performance in recent weeks has occurred even as the 10-year Treasury has inched up to 3.00%.
Activity last week was stronger as participation improved. The underlying theme continues to be driven by investors seeking current cash flow and protection from rising market rates. With the Fed now expected to increase rates twice more this year, investors have focused primarily on defensive structures such as new issue or seasoned 15-year MBS.
The following represents a summary of the activity last week and themes in the overall sector:
- 10-year 3.0s – Current production offering high levels of near-term scheduled cash flow.
- Seasoned 15-year 2.0s to 3.0s – The flat yield curve and relative value in these coupons has driven investors to this segment. There continues to be a relatively small pay up over TBA for pools with seasoning between 18 to 36 months. In some cases, investors can potentially receive less price volatility and greater stability of cash flows relative to new pools, for a modest trade-off in projected yield. Please see a recent Strategic Insight discussing the current merits of slightly seasoned, below par 15-year MBS.
- 15-Year 3.5s and 4.0s – Represented the majority of trading in the 15-year sector last week. 15-Year 4.0s are trading at relatively low premiums (~$103.00) and offer a projected yield spread to Treasuries of approximately 50bps (in the base case at Bloomberg median speeds).
- Seasoned 20-Year 3.0s and 4.0s – Seasoned pools with WAMs ranging from 180-200, an alternative to new issue 15-year MBS with higher premiums.
- 30-Year 4.0s – Several trades in current production pools, with some of the pools consisting of Jumbo loans, and others targeted for potential Community Reinvestment Act credit. We’ve also seen certain investors focused on Quicken production as this paper may offer higher turnover.
- FNMA DUS and Freddie K’s – The focus for FNMA DUS has been on 7-year finals while demand for Freddie K’s has been on the 4- to 8-year part of the curve.
Mortgage Rates and Refinance Activity
- Benchmark mortgage rates moved higher for the third consecutive week (9/14).
- 15-year mortgage rates increased 4bps to 3.89%, 32bps above the 12-month average of 3.57%, and 14bps above the YTD average of 3.75%.
- 30-year mortgage rates increased 7bps to 4.53%, 34bps above the 12-month average of 4.19%, and 20bps above the YTD average.
- 15-year mortgage rates have increased 69bps in 2018, while 30-year mortgage rates are up 68bps YTD.
Mortgage Applications: Mortgage applications decreased 1.8% from one week earlier as interest rates moved higher. Refinance submissions decreased 6.0% from the previous week to the lowest level since December 2000. The refinance share of application activity decreased to 37.8% from 38.9% the previous week.
Michael S. Erhardt, CPA
Senior Vice President
Vining Sparks, IBG