September 5, 2017
Trading activity across the MBS and CMO sectors was active mid-week last week as the mortgage and overall bond market continues to trade in a tight range with minimal changes in yield spreads. Mortgage rates rose 3bps last week and mortgage applications fell 2.3% on a 2.7% drop in purchase apps and a 2.0% decline in refi apps. Home prices increased 5.65% YoY in S&P Case-Shiller’s June report and continue to be pushed higher as a result of steady demand and tight supply. The July pending home sales report showed a 0.8% pullback with affordability and tight supply listed as drivers of the slowdown in contracts.
- Mortgage yield spreads were mixed last week:
- 15-year and 30-year MBS yield spreads ended the week 1 to 2bps wider to Treasuries
- 15-year and 30-year MBS yield spreads ended the week 1 to 2bps tighter to swaps
- Curve slope measured by 2- and 10-year Treasuries flattened 3bps last week from 84 to 81bps.
- Investors were active last week in new and seasoned 15yr MBS, primarily in 3.5% coupons.
- Investors were also active in newer and moderately seasoned 20yr MBS, primarily in 3% to 3.5% coupons and in seasoned 30yr MBS with 4% coupons.
- Investors looking for shorter duration were also active last week in new and moderately seasoned 10yr MBS.
- Investors were also active in multi-family uncapped floating rate Freddie K’s and ACE bonds, taking advantage of higher yield opportunities in LIBOR rates.
Trading activity in CMOs was active mid-week last week with slightly wider yield spreads in certain CMO structures. Depositories continue to focus on stable structures with 4- to 6-year average lives.
- Investors were active in CMO floaters taking advantage of higher yield opportunities in LIBOR rates.
Rates and Refis
- Mortgage rates rose last week:
- 15-year mortgage rates rose 3bps to 2.98%
- 30-year mortgage rates rose 3bps to 3.77%
- 15- and 30-year fixed mortgage rates have now fallen 26 and 29bps year-to-date; however; mortgage rates are 30 and 37bps higher than this time last year.
- Mortgage applications for the week ending August 25 fell 2.3% on a 2.7% drop in purchase apps and a 2.0% decline in refi apps. Looking at the bigger picture, the overall trend for purchase apps has been weaker since mid-June. Refinance activity remains at historically low levels and the Refi Index reveals that burnout dominates an unincentivized population of mortgage holders this year.
S&P Case-Shiller Shows More Home Price Gains: The S&P Cash-Shiller 20-City Metro Home Price Index rose 0.11% in June compared with May and 5.65% from June 2016; both were slightly better than expected. The YoY rate of price appreciation for the 20-City Metro area has slowed in each of the last three months and June’s 5.65% gain was the weakest of 2017. However, in a longer context the pace of price increases remains at one of its strongest levels since 2014. While the pace slowed in the major metro areas, the broader national index rose 5.77% from June 2016 at its fastest pace in three years. Home prices continue to be pushed higher as a result of steady demand and tight supply.
Pending Home Sales Pullback: The July pending home sales report showed a 0.8% pullback in new contract signings compared with expectations for a half-percentage point gain. Looking at the regional results, sales were softer across the board and the three of the four regions reported MoM declines. The NAR’s chief economist said about the data, “Buyer traffic continues to be higher than a year ago, the typical listing has gone under contract within a month since April, and inventory at the end of July was 9 percent lower than last July.” The resultant higher prices are keeping a lid on buying as affordability remains a headwind. He added, “The reality, therefore, is that sales in coming months will not break out unless supply miraculously improves.”
Dan Stimpson, CPA
Senior Vice President