Lack of supply became an issue at the forefront last week. Countrywide Securities, however, suggested in recent comments that relief may be in sight, especially if rates move higher, due to growing originator pipelines. Until this happens, one trader suggested that a potential liquidity problem, due to the lack of product, is beginning to adversely impact the roll market.
Events that have favored mortgages and contributed to strong spread tightening remain in play. These include record-level paydowns that must be reinvested, flat to negative net issuance, and the slow economic recovery which is keeping bank C&I lending low. In addition, there is the Treasury Refunding next week which tends to be favorable for mortgages, and, this week, month-end buying.
MBS Index Extends in April
With the strong paydowns and increased lower coupon issuance, the MBS Index is expected to extend 0.13 years, according to researchers at Lehman Brothers. At the same time, the Treasury Index is forecast to lengthen a slight 0.01 years, the Agency Index should move out 0.11 years, and the Credit Index plus 0.07 years. Overall, the Aggregate Index is set to extend 0.09 years.
Refi Index Slips on Easter Slowdown
For the week ending April 18, mortgage applications fell, reported the Mortgage Bankers Association. This was expected given a pair of holidays, Passover and Easter, during the week. The Purchase Index declined 4% to 360, while the Refi Index was off 8% to 5104.
As a percent of total applications, refi activity represented 68.4% versus 69.4% in the previous week. The share of ARM activity also fell to 14.8% from 15.3%.
Meanwhile, mortgage rates were slightly lower. According to the MBA, the 30-year fixed contract rate slipped three basis points to 5.67%.
At this time, if rates continue to hold around current levels, the MBA's Refi Index is expected to drift lower. Lehman suggests a level of 4500 by the end of May due to burnout.
Will Speeds Peak in April?
Bear Stearns released its prepayment outlook last week, anticipating that speeds on most coupons and vintages will peak in April. For 2002 Fannie 5.5s, Bear predicts April will report in at 21% CPR versus 10% in March, then fall to 17% in May and 13% in June. On 2002 6s, speeds are expected to jump 33% to 49% CPR before falling modestly to 47% and 43% in May and June, respectively. As for 2002 6.5s, speeds are seen increasing to 65% CPR in April from 54% in March, then falling to 64% in May and 59% in June.
Consensus has speeds increasing in April on Fannies, holding flat to 1% higher in May, then slowing around 3% in June. For Ginnies, speeds are expected to increase sharply on 2002 7s and lower, then slow about 1% in May with further slowing seen in June. The April prepayment report is released on Wednesday, May 7.
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