September 9, 2019
Yield spreads for current coupon MBS to Treasurys tightened during last week’s bond market sell-off, with 15-year tightening by 2 bps to 62 bps, while 30-year contracted 6 bps to 89 bps. However, higher coupons were largely unchanged on the week.
Yield spreads remain near their multi-year highs, as investors have approached premiums with an extra dose of caution. The decline in duration due to accelerating prepayments, lower Treasury yields, and increased agency issuance have also contributed to spreads widening this year.
Activity last week was strong with a healthy degree of buying and selling. We continue to see investors selling seasoned TBA deliverable FNMA/FHLMC 10- and 15-year into the TBA bid. The TBA bid for seasoned pools can result in a negative take-out yield (projected yield to the buyer) to the Treasury curve. The trade works best for coupons ranging from 2.50% to 4.00% with a current weighted-average maturity of 80 months or less. Reinvestment has generally been focused on specified pools with call protection stories (smaller loan balances, seasoned pools) and/or higher-duration product with locked-out cash flow.
The following is a list of actively traded sectors and coupons:
- 15-Year 2.0s to 3.0s – The majority of the trades were in new-issue 3.0s.
- 20-Year 3.0s – Investors seeking slightly higher yields and duration targeted new-production 20-year pools.
- Off-The-Run-Collateral – Buyers looking for higher yields have purchased non-TBA deliverable Jumbo, High LTV, and relocation collateral.
- CMBS – The focus for CMBS (Fannie DUS & Freddie Ks) was on finals in the 7- to 10-year range with lower premiums.
Mortgage Rates and Refinance Activity
Mortgage applications for the week ending August 30 fell 3.1% despite another decline in mortgage rates during the reference week. According to the MBA report, the average 30-year mortgage rate dropped from 3.94% to 3.87%, the lowest since before the Fed began raising rates and down 1.30% from November’s peak. The cycle-low for 30-year mortgage rates, according to the MBA data, was just below 3.50% back in late-2012. On a positive note, purchase apps in the current report rose 3.6% and are now approaching their highest levels since 2013. Refi apps fell 7.0%.
Michael S. Erhardt, CPA
Senior Vice President, Investment Strategies
Vining Sparks IBG, LP