September 30, 2019
Yield spreads for current coupon MBS to Treasurys were mixed last week as the overall Treasury market moved higher in price. 30-year MBS widened by 2 bps to 100 bps, while 15-year tightened 1 bp to 68 bps.
Refi risk appears to have receded over the past few weeks. The latest refi index is currently 30% below the mid-August peak. Yield spreads on mortgage product remain at multi-year highs, making for relatively attractive valuations, especially in 15-year. Based on spread metrics, 15-year have reached some of the cheapest levels versus 30-year in some time (see graph below).
Activity was steady last week as investors continued to add MBS. The following is a list of actively traded sectors and coupons:
- 10-Year 2.5s – New production pools with relatively short weighted average lives.
- 15-Year 2.0s to 3.5s – Trades reflected a mix of new production and seasoned pools.
- 20-Year 3.0s – Newer production 3.0s traded well reflecting a pick-up in spread over 3.5s.
- Off-The-Run-Collateral – Buyers seeking higher yields focused on 30-year pools collateralized by non-conforming jumbo loans with 3.5% coupons.
- CMBS – The focus for CMBS (Fannie DUS & Freddie Ks) was on finals in the 5- to 10-year range with lower premiums. This product along with lower coupon MBS has been a prevalent trade for investors seeking locked-out cash flow, positive convexity, and higher yields.
- CRA Targeted Pools – Traded several MBS pools created for financial institutions seeking eligible credit for compliance with the Community Reinvestment Act.
Mortgage Rates and Refinance Activity
Benchmark mortgage rates were relatively stable last week. 15-year mortgage held firm at 3.21%, while 30-year mortgage rates decreased 1 bp to 3.74%. Mortgage applications for the week ending September 20 fell 10.1% on a 3.1% drop in purchase apps and a 15.2% drop in refi apps. Even with the pullback in weekly purchase apps, the monthly data still point to a positive month for home purchases.
Michael S. Erhardt, CPA
Senior Vice President, Investment Strategies
Vining Sparks IBG, LP