Mortgages continued on a tightening path as the market held range bound, volatility remained low, and supply limited. Originator selling did pick up last week up from the previous week, but just back to average daily amounts of $1 billion. Most of the supply was in 5.5% coupons and was readily absorbed by investors and CMO desks, in particular.
With the trend toward a flatter Treasury curve, primary interest was down in coupon; however, towards the latter part of the week, higher coupons began attracting interest on the recent cheapening and attractive carry. In recent comments from Bear Stearns, analysts noted that 30-year 5.5s through 6.5s offer the best risk adjusted carry after factoring for duration, convexity and implied volatility. UBS also advocates up-in-coupon for leveraged accounts as its researchers believe speeds will slow more than the market predicts. They also like premium mortgages versus the front end of the curve for real money accounts.
Spreads were three basis points tighter in 30-year FNMA 4.5s last week; two basis points tighter in 5s and 5.5s; one basis point tighter in 6s; and one basis point weaker in 6.5s. In 15s, spreads were three, two and one basis point richer, respectively, for 4s through 5s; 5.5s were one basis point wider.
Expectations are that the market can continue to tighten as supply remains low and overseas interest remains strong.
Mortgage application activity recovers from holidays
Mortgage application activity jumped in the latest report, as life returned to normal with the holidays past. According to the Mortgage Bankers Association, the Refinance Index rose 19% to 2049,versus 1721 for the week ending Jan. 14. The Purchase Index increased 14% to 448, which should help put to rest for now potential concerns about the housing market caused by the last two reports that saw the index drop to its lowest reading in over a year. As a percentage of total application activity, refinancings were little changed at 48.9%, versus 49.0% in the previous survey. ARM applications also held steady at 32.8% versus 32.7%.
Fixed mortgage rates decline, ARM rates hold steady
Fixed mortgage rates declined for the week ending Jan. 21, according to Freddie Mac's latest survey. The 30-year fixed rate mortgage rate fell seven basis points to 5.67% while the 15-year fixed rate was down four basis points to 5.15%. At the same time, ARM rates held steady. For example, the one-year ARM rate rose just one basis point to 4.11% and the 5/1 hybrid was unchanged at 5.05%.
Looking ahead to this week's mortgage application report, activity should hold steady. Mortgage banks were closed for the Martin Luther King, Jr. holiday; however, which is likely to have affected activity.
January prepayments expected to decline
The January prepayment outlook is for speeds to slow around 10% across the board due to a decline in application activity over the period and one less collection day. Speeds are predicted to slow less than 10% in February before picking up in March, due in part to an increase in the day count.
The outlook for prepayments for the year is rather benign, says Deutsche Bank Securities in recent comments. Extension risk is not anticipated to be a major issue, analysts say, as long as national housing prices continue appreciating. Call risk is also is not expected to be an issue unless mortgage rates drop another 50 basis points.
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