It was an active week in mortgages last week as the 10-year Treasury pushed through 4% to the 3.90% level. There were several reasons for the strength in Treasurys including the setback for the EU on France's Constitutional rejection; the weaker than expected Chicago PMI; and the large lengthening in the Treasury Index. According to Lehman Brothers, the Treasury Index was set to extend 0.17 years last Wednesday, in large part due to the May refunding. This compares to an average May extension of 0.16 years and an average 12-month extension of 0.05 years.
The rally instigated strong down-in -coupon buying - especially into 5s - particularly from both real buyers and servicers. The move lower in coupon, however, was seeing a reversal from hedge funds on Thursday morning as Treasury prices were holding slightly lower after the release of revised first quarter productivity and costs that were stronger than expected. This left the market in somewhat of a holding pattern ahead of the May employment report due out last Friday.
The roll in FNMA 5s continued to strengthen even as the price moved to slightly above par. JPMorgan Securities said that virtually the entire 2005 float has been purchased by real money investors, keeping the roll well bid. Analysts add that 5s are now above par - which will change the "cheapest to deliver" - and could help to alleviate the situation. Further increases in price to around $101 could also cause 2003 5s to become TBA, adding $150 billion to the float, analysts said.
Originator selling, meanwhile, held to its $1 billion daily average. If rates continue to hold lower, however, fixed supply could start to pick up on increased ARM to fixed refinancings.
Over the week ending last Wednesday, spreads were nine to 10 basis points tighter in 30-year Fannie 4.5s and 5s; four basis points in on 5.5s; and two basis points firmer in 6s. In 15s, spreads had tightened five to seven basis points in 4s and 4.5s; and two to three basis points in 5s and 5.5s.
Application activity unresponsive to dip in rates
Mortgage application activity declined slightly for the week ending May 27. The Purchase Index was down 4% to 463, and the Refinance Index was off 1% to 2142, according to the Mortgage Bankers Association. As a percentage of total application activity, refinancings were 41.2%, up from 40.3% in the previous report. ARM share declined to 33.3% from 34.8%.
Fixed mortgage rates were reported - not surprisingly - slightly lower last week. Freddie Mac's weekly survey showed the 30-year fixed rate mortgage averaged 5.62%, down three basis points from the previous week. The rate has declined in nine out of the last ten weeks, and is just above this year's low of 5.57% in early February. The 15-year fixed rate came in at 5.20% versus 5.21% previously; 5/1 hybrids rose three basis points to 5.10%; and one-year ARMs were up five basis points to 4.26%.
Given mortgage rates, it is expected that application activity responded last week after stalling the previous week. JPMorgan predicts the Refinance Index will increase about 10% to the 2400 area. Analysts add that if rates decline roughly 10 basis points, the Refinance Index could reach 3000.
May prepays expected to hold in narrow range
With the May prepayment report due out Monday night, speeds are expected to be unchanged to slightly faster for 4.5s, 5s, and 2004 vintage 5.5s and 6s. Other coupons and vintages are expected to slow around 5% from April's levels. Factors influencing the report include day count - 21 days in May, the same as in April - mortgage rates (the 30-year fixed rate mortgage rate averaged 5.86% in April versus 5.93% in March) and the Refinance Index, averaging 1971 in April, down just slightly from 1999 in March.
Looking further out to June, speeds are currently expected to increase around 10%. There is one extra business day included in the day count. Additionally, mortgage rates in May averaged 5.72% and the Refinance Index averaged 2153.
The level seen as triggering a significant increase in prepayments and supply is a 3.85% yield on the 10-year Treasury which corresponds to a 5.60% 30-year fixed mortgage rate, according to Bear Stearns. Countrywide Securities analysts believe that a 30-year mortgage rate firmly inside of 5.5% could incite a new refinance wave, probably implying a 10-year at or inside of 3.75%.
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