Market activity started off slow last week ahead of three notable events: Hans Blix's report to the United Nations Security Council regarding Iraq on Monday; Tuesday's State of the Union address from President Bush, and Wednesday's rate statement from the Federal Open Market Committee. In addition, on Tuesday originators dumped nearly $4 billion of supply on a sidelined investor market. The passing events, as well as supply and weakened spreads, were enough to draw in investors by late Tuesday, a turn that continued through Wednesday's trading session. In Thursday's session, originators were again heavy sellers bringing around $3 billion by mid-day; however, the brief widening pulled in buyers quickly.
Last week's buying interest extended beyond the conventional 30-year sector for once. A backup in yields focused attention on extension risk and thus, active buying in the 15-year sector. The sector also got support from CMO-related buyers. Ginnie Maes also performed well on better interest related to light supply relative to conventionals, and to less volatility in rolls. As a result, over the Wednesday-to-Wednesday period, both Ginnie 30s and 15-year MBS outperformed Fannie Mae 30s with the exception of the current coupon, which tightened six basis points in all sectors. Fannie 30-year 6s through 7s were flat to a tad weaker; Ginnie 6s through 7s ranged from minus four to minus two basis points; and dwarf 5.5s and 6s were seven basis points firmer.
Over the near term, the technical story should continue to dominate. According to analysts from Lehman Brothers, they anticipate $71 billion in conventional paydowns in January. This compares to an average of $52 billion in 2002.
Lehman researchers expect another big extension in the MBS Index for January - 0.13 years. In other sectors, U.S. Treasuries will be unchanged, agencies will lengthen 0.06 years, the corporate index will gain 0.07 years, and the Aggregate Index will climb 0.07 years.
Mortgage applications rise as rates hold steady
For the week ending Jan. 24, the Mortgage Bankers Association (MBA) reported that mortgage applications increased on a holiday-adjusted basis. The Refi Index gained 8% to 5858 and the Purchase Index was up 3% to 366. Researchers at Salomon Smith Barney attributed the gain in applications to the decline in interest rates. They also noted that the Refi Index remains below October's peak levels despite similar and better mortgage rate levels. Salomon believes burnout is the reason, and in order for the Refi Index to hit new highs, sub-6% no point loans would have to become widely available.
As a percentage of total applications, refinancings were 75.4%, down slightly from 75.7%. In addition, the MBA reported that the share of ARM activity fell to 13.2% from 13.8%.
Mortgage rates dipped slightly for the week ending Jan. 31. This was a bit surprising as rates were expected to be a couple of basis points higher. Freddie Mac reported that the 30-year fixed mortgage rate fell one basis point to 5.90%. This is just five basis points above its record low of 5.85%, which was recorded for the week ending Jan. 3. The 15-year fixed mortgage rate declined three basis points to 5.28%, just four basis points higher than its record low. Lastly, the one-year ARM rate reported in at a new record low of 3.89% compared to 3.93% last week.
January prepayment expectations mixed
Regarding January prepayments, the Street is pretty mixed on whether there will be further increases or slight declines in speeds. Lehman analysts say they expect slightly lower speeds as a result of the Christmas and New Year's holidays.
Researchers from JPMorgan, on the other hand, believe that speeds will be marginally faster. This comes from conversations they have had with large mortgage lenders. Overall, they raised their projections about 3 CPR, which translates into a 2-4% increase over December's levels. Based on expectations of various analysts, the consensus shows speeds flat to about 2 CPR lower. The table on this page gives the latest consensus expectations on selected Fannie Mae coupons and vintages. The January report comes out Friday, Feb. 7.