This week was one of those rare ones so far this year that had no market roiling headlines, and it made for rather monotonous trading for the most part.

Next week, however, can be a much different story due to the two-day Federal Open Market Committee meeting beginning Tuesday and concluding on Wednesday given what they may or may not say regarding Operation Twist and QE3. 

There was one exception to the uninspiring flows and unique to the mortgage sector, however. This was Class C (GNMA) pool allocations on Tuesday with April/May dollar rolls dropping sharply based on higher coupons as illustrated by the 5.5 roll. This roll declined 10 ticks between the open and mid-morning.

Higher-coupon GNMA rolls remained mostly under pressure through the remainder of the week. The lip in rolls is also due primarily to the uncertainty related to Bank of America's (BofA) Federal Housing Administration delinquency buyouts. 

BofA bought out a sizeable amount of delinquencies in 6.0% and 6.5% coupons in March. However, its delinquency pipeline remains full. 

Morgan Stanley analysts pointed out that the March buyouts appeared to have been just somewhat higher than the average growth in 90+ delinquencies over the past 10-months and that they represented roughly 10%-11% of total potential buyouts.

Considering this, buyout risk for BofA-serviced pools is expected to remain very high across the coupon stack, Barclays Capital analysts said. However, they expect buyouts will be focused initially on higher coupons. Currently, Deutsche Bank Securities analysts anticipate increased buyout risk in 5.5s for April and Citigroup predicts 4.5s will be at risk in May. 

Beyond that, ongoing eurozone worries with Spain in the spotlight was partially offset by favorable earnings news, which provided a continued modest safety bid that held the 10-year note yield in a narrow corridor of 1.954% to 2.009%.

The one modest backup did bring out increased mortgage banker supply. However, the supply-induced widening brought in investor interest as the technical outlook remains very attractive for the sector.

So despite the price and yield levels, there was a steady presence of money managers, REITs, banks and hedge funds as well as the Federal Reserve, albeit volume was limited with Tradeweb reporting an average for the week through Thursday of 88%, similar to last week's average.

Further demonstrating the supportive technicals, the Fed held to a daily average of $1.4 billion in net purchases over the week ending April 18. This covers around 65% of the daily mortgage banker selling over the same period.

Based on an estimated $22 billion left of $29 billion, the Fed anicipates to buy through May 10. Its purchases should remain steady at a $1.4 billion per day average, which covers 70% of originations on a normal supply day worth $2 billion.

In other mortgage-related activity, dollar rolls were lower on the higher prices; 15s mostly lagged 30s on the flatter curve, while specified pools were modestly active with interest in call protected paper. 

Additionally, there were more BWICs of CR/U9 paper (>125 LTV), including with 15- and 20-year loans totaling around $1 billon. 

Mortgages underperformed Treasurys over the five-day period ending April 19 by 10 basis points, according to Barclays Capital's MBS Index, bringing the month-to-date performance to -12 basis points. The 30-year current coupon yield declined to 2.90% from 2.95% with the spread to 10-year notes holding steady at 95 basis points. 

 Prepayment Outlook

Conventional prepayment speeds are projected to slow around 5% on average in April from March with 4.5% coupons and lower dropping around 10%. 

A strong factor is the lower number of collection days at 20 from 22, while refinancing activity declined 16% on average in March from February as mortgage rates moved off their record low of mid-February. 

Meanwhile, 5.5s and higher are seen slipping just 2.0% or less on increased HARP 2.0 refinancing activity. The 30-year GNMA I speeds are expected to slow 10% on average with 6% and 6.5% coupons dropping 15%-20% after a surge in March due to BofA delinquency buyouts.  Overall, MBS paydowns are estimated at $118 billion from $148 billion in March. The gross issuance month-to-date totals $50 billion.

Looking ahead to May, speeds on 30-year FNMAs and FHLMC Golds are expected to be flat to slightly higher on 3.5% through 5.0%s as day count increases by two days and by around 5% on higher coupons.  


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