September 24, 2018
Yields spreads for current production coupon MBS to Treasuries continued the trend and tightened a couple of basis points this past week, as the overall bond market trended higher in yield for the third consecutive week, while mortgage rates have increased for the last four weeks. Valuations continue to remain near their highs for the year despite the modest tightening the last several weeks.
Activity last week started out slow, but participation improved as the week progressed. 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 mid-week this week and once more later this year, investors have focused primarily on defensive structures such as new issue or seasoned 15-year and seasoned 20-year MBS. The following represents a summary of the activity last week and themes in the overall sector:
- 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 – 15-Year 4.0s are trading at relatively low premiums (~$102) 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.
- 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 fourth consecutive week (9/21).
- 15-year mortgage rates increased 8bps to 3.97%, 40bps above the 12-month average of 3.57%, and 22bps above the YTD average of 3.75%.
- 30-year mortgage rates increased 13bps to 4.66%, 46bps above the 12-month average of 4.20%, and 31bps above the YTD average of 4.35%.
- 15-year mortgage rates have increased 77bps in 2018, while 30-year mortgage rates are up 81bps YTD.
Mortgage applications increased 1.6% from one week earlier, rising for the first time in over a month and just the second time in the last 10 weeks. Refinance activity increased 3.7% for the week ending September 14th, after falling 5.9% from the previous week to the lowest level since December 2000. The gain for the refinance index occurred even as the MBA reported its average 30-year mortgage rate ticked up from 4.84% to 4.88%, its highest level since 2011. On a four-week average basis, refinance activity is at the lowest level of the cycle. The refinance share of application activity increased to 39.0% from 37.8% the previous week.
- Housing starts jumped 9.2% in August as multi‐family activity surged 29.3% and single‐ family activity picked up a more modest 1.9%. Building permits tumbled 5.7% as single-family interest fell 6.1%, the most since 2011, and multi‐family dropped for a fifth month in a row.
- Home builder sentiment was steady in September, better than the one‐point drop expected.
- Existing home sales disappoint and were flat in August, missing expectations for a fifth month in a row and holding at their slowest pace since February 2016. The median price was pulled lower by seasonal patterns and was up 4.6% YoY, lower than 2017’s 6.0% average gain, while supply rose YoY for the first time since May 2015.
Dan Stimpson, CPA
Senior Vice President