Mortgage flows were active and two-way again last week. The week started off with good buying on a combination of paydown reinvestment and a Treasury market rally. There was better buying in both 30s and 15s from the real and fast money crowd, and overseas buyers made a modest appearance as well. Within the 30-year sector, 5s benefited from short covering; 5.5s saw two-way flows, while 6s were hit by selling to move down in coupon. Meanwhile, strong originator selling also weighed on 6s. By mid-week, however, the buying turned to selling as the market sold off with the weak five-year Treasury auction. Investors reversed earlier trades and were moving up into 6% coupons and Dwarf 5s. In early trading Thursday, spreads were tighter on light buying and limited originator selling. Most investors were awaiting the results of the 10-year Treasury auction - which went well. Expectations are that MBS buying will pick up as near-term sentiment improves.
Heading into this week, there is inflation data on Tuesday and Wednesday to get through. Other activities related to mortgages include the 48-hour notification beginning on Tuesday for 15-year MBS and on Thursday for 30-year GNMAs. Overall, mortgages remain sensitive to market direction. Stable to firm yields should attract buying in MBS, while a 4.70% 10-year Treasury yield could see another round of servicer selling.
Analysts neutral to slightly negative
Analysts remained mostly neutral to slightly negative last week despite the improved valuations. For example, JPMorgan Securities analysts said that fundamental problems remain in the sector as the Federal Open Market Committee continues tightening, leading to more selling potential. Credit Suisse First Boston analysts are concerned with the increase in servicer selling and the potential for higher volatility due to uncertainty surrounding the inflation outlook, rates, the curve, and FOMC activity in 2006.
Mortgage application activity rises
Mortgage application activity increased slightly for the week ending Nov. 4. According to the Mortgage Bankers Association, the Refinance Index slipped 3.40% to 1799 while the Purchase Index rose 6.40% to 466. As a percentage of total application activity, refinancings were 41.7% versus 43.6% previously. Meanwhile, ARM share increased to 31.6% from 29.4% by number of loans. By dollar volume, ARM share increased to 47% from 45%. This is the highest it's been since this spring when volume ranged mostly between 48% and 50%.
Freddie Mac reported further increases in mortgage rates last week. The 30-year fixed mortgage rate averaged 6.36%, up from 6.31% the previous week. This is the highest the 30-year mortgage rate has been since September 2003, when it hit 6.44%. Meanwhile, 15-year mortgage rates increased to 5.89%, up four basis points; 5/1 hybrids reported in at 5.81% versus 5.76% previously; and the one-year ARM rate rose three basis points to 5.12%.
October prepays mostly in line with expectations
The October prepayment report - released Nov. 4 - was essentially uneventful. In general, FNMA 4.5s, 5s, 5.5s, and 6.5s were more or less in line at 5% to 6% slower versus consensus expectations of 7% to 8%. Speeds on 2004 and 2003 6s, however, actually increased. In a report from JPMorgan, analysts noted that the larger Fannie Mae servicers had increases in speeds for these vintages while the smaller servicers slowed. Lehman analysts attribute the slight increase to higher pull-through as refinancers locked in as mortgage rates started climbing in October.
Speeds on FHLMC PC Golds were mostly lower - including 6% coupons - with similar to slightly larger declines in FNMAs. It is noteworthy that in the 2003 and 2004 6% vintages, speeds on Golds are four to five CPR slower than FNMAs. Analysts aren't sure why there is such a large difference, or if it will carry forward. The Ginnie Mae report was also unremarkable, with speeds continuing to prepay faster than conventional counterparts.
Fixed-rate paydowns totaled about $52 billion, according to JPMorgan. Net fixed rate issuance was approximately $20 billion, analysts added, with 30-year issuance increasing $24 billion while 15-years fell by $4 billion.
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