Mortgage spreads were hit as buying slowed down following the weak employment report. The 10-year yield rallied 18 basis points on Jan. 9 to close at 4.08%. Last week, the market stayed firm and finally closed below 4% on Wednesday. Originator selling also picked up and averaged about $1.5 billion per day. Since the start of the year, originators have brought over $11 billion, mostly in 5s and 5.5s. Over the week before press time on Thursday, spreads on 30-year Fannie Mae's were six basis points wider in 5s and 5.5s, and three basis points weaker for 6s and 6.5s. Dwarfs are plus eight to 10 basis points in 4.5s through 6s. Somewhat surprising has been the limited convexity buying in Treasurys so far. It is expected to pick up, however, if the 10-year yield falls much further from Wednesday's close.
The impact of lower rates was initially wider spreads, but investor interest started to return in Thursday's trading session on the recent cheapening and a light supply day. At mid-day, spreads were slightly tighter. In comments last week, suggested that mortgage spreads are likely to widen if the market rallies or rates hold at current levels. An increase in supply initially will not be met by banks or the GSEs until some widening occurs - UBS suggests five to seven basis points cheapening for banks, and around 10 basis points for the GSEs. At the same time, mortgage spreads are expected to widen in a sell-off as a result of supply; however, after that is absorbed, JPMorgan Securities says mortgages should outperform as investors appear to be short.
Given the current yield levels, on Wednesday JPMorgan turned neutral on the basis due to increased convexity risks (see related story on p. 12). UBS said it was holding with its neutral recommendation given the conditions. Analysts also suggested investors take profits in their up-in-coupon trades. JPMorgan is also not favoring the higher coupons and suggests investors use 15s as an alternative. RBS Greenwich Capital expects mortgages to continue to struggle until the market gets further direction and stabilizes.
Mortgage applications jump in first week of New Year
The Mortgage Bankers Association (MBA) reported strong gains in mortgage application activity in response to the decline in mortgage rates for the week ending Jan. 9. The Purchase Index rose 11% to 446 while the Refi Index surged 25% to 2196. On an unadjusted basis, the Refi Index soared 77%. On Tuesday, Countrywide Securities reported increased activity over the prior two weeks and predicted an increase to the 2100 area for the Refi Index. As a percentage of total applications, refinancings were 51.6% versus 49.7% in the previous report. ARM share fell to 26.6% versus 30.3%.
Mortgage rates plunge, back to mid-July levels
Freddie Mac reported sharp declines in mortgage rates for the week ending January 16 -not unexpected given the strong rally. The 30-year fixed rate mortgage rate fell 11 basis points to 5.66%; the 15-year rate was down 20 basis points to 4.97%; and the one-year ARM rate slipped 14 basis points to 3.62%.
At current levels, over 40% of the market has some form of refi incentive. Given last week's decline, analysts expect this week's Refi report to move towards 3000 from 2195.
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