FRM Update

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:

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

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