August 17, 2020
For the second week in a row, economic data was largely better than expected and Treasury yields increased in a steeper fashion. The S&P 500 also broke above all-time highs twice but failed to close above. Record 10- and 30-year Treasury auctions helped propel longer maturities higher than their shorter counterparts. The 2-10 spread closed 12 bps higher at a level of 56, a level not seen since mid-June.
Fannie/Freddie Announce Refinancing Fee
Last week, on August 12th, both Fannie Mae and Freddie Mac announced a new 50bps ‘adverse market fee’ that will apply to substantially all refinancing transactions. The 50bps fee will be implemented, according to the Enterprises, due to increased risk and anticipated higher costs related to COVID-19 and will be effective on September 1st, 2020. This doesn’t appear to be a big impediment to elevated levels of refinance activity, many estimate the impact equivalent to an 1/8 increase in mortgage rates. The fee was met with strong pushback from the mortgage industry as well as the White House.
Markets are within a tight range from Friday’s close. The Dow is down 0.3%, the S&P is up 0.4% and the NASDAQ is up 0.7%. The Treasury curve’s slope is currently 3 bps tighter at 53 bps from Friday’s close of 56 bps. From a yield perspective, Treasury bills are unchanged, 2- to 10-year maturities are 1-4 bps lower, and long bonds are down 3-4 bps.
Food for Thought – Primary/Secondary Spread Still Elevated
Last week we looked at examples of prepay protection on mortgage pools continuing to attract investor interest. This week, we take a step back and consider why these prepay protections are found valuable to many investors. If we consider a 5-year history of the Primary/Secondary spread (the difference between current mortgage rates and par priced MBS) and 30-year mortgage rates you will notice a couple things. First, the P/S spread is unusually high and secondly, mortgage rates are unusually low.
The P/S is elevated for reasons including increased risk, increased costs, and refi capacity by lenders. That being said, it is possible for rates to remain relatively unchanged and we could see mortgage rates drop further and pressure the P/S spread back towards a more normal level. To be sure, few things are “normal” in this market environment but for large refinancing businesses, keeping your pipelines going, even if that means cutting rates and sacrificing a little profit, remains preferable to the alternative.
This brings us full circle; investors are attracted to loan characteristics that help insulate them against refinances in the event mortgage rates continue to decline and the P/S spread narrows. Loan balance pools are the most prominent. We know, the lower a loan balance the greater the rate incentive must be for a refinance to make economic sense. So even if mortgage rates decline further, many loan balance pools would still be out of the money to refinance.
Spread Commentary – MBS Wider, Others Tighter or Unchanged
(Click links below for more details)
- Government/Agency Space
- Bullets unchanged on short end, 10-year tighter 3 bps. All still wider YTD.
- Callables were 3-7 bps tighter save the 10-year which was unchanged.
- Agency CMBS, MBS, and ARMs
- BQ Munis, 5-year 6 bps tighter, 10-year 14 bps tighter, 15-year 11 bps tighter.
- GM Munis, 5-year 7 bps tighter, 10-year 14 bps tighter, 15-year 17 bps tighter.
- Taxable Munis, 5-year 14 bps tighter, 10-year 14 bps tighter, 15-year 9 bps tighter.
- Corporates were unchanged, still wider YTD on 5-year and longer maturities.
What We’re Reading
Market Today | Daily
Weekly Recap | Weekly, Friday
Brokered Deposit Rate Indications | Weekly, Monday
Investment Alternatives Matrix | Weekly, Tuesday
MBS Prepay Commentary (August) | Monthly, 5th business day
SBA Prepay Commentary (August) | Monthly, 10th business day
Freddie Mac: Mortgage Rates Move Up
“Even with this week’s uptick, very low rates are providing a significant boost to the housing market that continues to hold up well during this time of uncertainty.”
“After accounting for seasonal factors, sales were 1.7% higher compared to February, the month before the pandemic shut down much of the economy.”
Vining Sparks: Coronavirus Chartbooks
PDF/Mobile: Coronavirus Chartbook (PDF)
Fannie Mae: 8/12 Lender Letter LL-2020-12 – New Adverse Market Refinance Fee
Federal Reserve: 8/11 Federal Reserve announces revised pricing for its Municipal Liquidity Facility
Federal Reserve: 8/10 Individual large bank capital requirements, effective October 1
Federal Reserve: 8/6 Details of new 24x7x365 interbank settlement service to support instant payments
Federal Reserve: 7/29 Federal Reserve issues FOMC statement
Federal Reserve: 7/28 FRB extends through 12/31 lending facilities scheduled to expire on or around 9/30
Federal Reserve: 7/17 FRB modifies MSLP to provide greater access to credit for nonprofit organizations
Federal Reserve: 7/1 Minutes of the Federal Open Market Committee, June 9-10, 2020
LIBOR Transition Links
ARRC 8/7: ARRC Releases the SOFR Starter Kit
ARRC 4/17: ARRC Announces Its Key Objectives for 2020
Fannie Mae: LIBOR Transition Webpage
Freddie Mac: LIBOR Transition Webpage