September 4, 2018
During the past week, 15-year MBS yield spreads to Treasuries were unchanged while spreads for 30-year MBS to Treasuries widened by 1bp. However, over the past month, spreads have widened by 2bps to 4bps, and currently sit near their widest points of the year.
Activity was steady last week as investors focused primarily on seasoned and new production 15-year MBS. The pay up over TBA for seasoning continues to remain reasonable. The following represents a summary of the activity last week and themes in the overall sector:
- Seasoned 15-year 2.5s and 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 – Activity has been evenly split among these coupons. 15-Year 4.0s are trading at relatively low premiums (~$103.00) and offer a projected yield spread to Treasuries of approximately 50bps.
- Seasoned 20-Year 2.5s and 3.5s – Seasoned pools with WAMs ranging from 180-200, an alternative to new issue 15-year MBS with higher premiums.
- 30-Year 4.5s – New production pools.
- Non-TBA pools – Relocation, seasoned high LTV typically offer higher turnover.
- CRA Pools – The trading desk routinely creates custom MBS pools to assist financial institutions with the Community Reinvestment Act requirements.
- 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 7-year part of the curve. There has also been some renewed interest in Freddie K floaters, as spreads have widened over the past few months and have now reached levels that were last seen back in mid-November 2017.
Mortgage Rates and Refinance Activity
- Benchmark mortgage rates edged higher for the week ending 8/31.
- 15-year mortgage rates increased 4bp to 3.82%, 32bps above the 12-month average of 3.50%, and 9bps above the YTD average of 3.73%.
- 30-year mortgage rates increased 1bp to 4.41%, 27bps above the 12-month average of 4.14%, and 7bps above the YTD average.
- 15-year mortgage rates have increased 62bps in 2018, while 30-year mortgage rates are up 56bps YTD.
Pending Home Sales Signal Continuation of Slower Housing: Pending home sales slipped unexpectedly in July as contract signings in the South slowed 1.7% to offset smaller gains in the lower-volume regions. Total seasonally adjusted pending sales edged down 0.7% and were weaker on a YoY, non-seasonally adjusted basis for a seventh month out of the last eight. Sales in the West dropped 0.9% while activity in the Midwest moved up a modest 0.3% and deals in the Northeast, which accounted for the smallest share of existing sales volume in July at just over 10%, improved 1.0%. “It’s evident in recent months that many of the most overheated real estate markets – especially those out West – are starting to see a slight decline in home sales and slower price growth,” said the NAR’s Chief Economist, who added “The reason sales are falling off last year’s pace is that multiple years of inadequate supply in markets with strong job growth have finally driven up home prices to a point where an increasing number of prospective buyers are unable to afford it.” The disappointment was just the latest indicator of slowing housing activity and signals more softness for actual closings in the months ahead.
Michael S. Erhardt, CPA
Senior Vice President
Vining Sparks, IBG