Mortgage flows were steady both ways throughout the week. Originator selling remained within normal levels with the exception of Tuesday. The day saw nearly $2.5 billion. Supply managed to pressure spreads wider; however, this attracted money managers, which made the grind even tighter. Also providing support for the sector was a strong CMO bid, especially in 15-year collateral. Over the Wednesday-to-Wednesday period, spreads were one basis point wider in 30-year Fannie Mae 5.5s, where most of the supply was; and nine and three basis points tighter in 6s and 6.5s, respectively. In 15s, spreads were minus six basis points for dwarf 5s and 5.5s.
For now, extension risk has moved to the back burner and the technical and carry story are back in the forefront. But extension remains the greatest risk in the mortgage market. Analysts from Lehman Brothers warn of the potential of a significant change in the composition and convexity profile of the MBS Index over the next year as a result of the heavy paydowns and increasing representation of lower coupons in the index. They predict the duration of the index to extend by one-year, even if rates do not change. "Given the current size of the index, this amount of extension corresponds to $400 billion 10-year equivalents," say researchers from Lehman.
Mortgage Indexes hold firm as rates set new record lows
For the week ending Feb. 14, the Mortgage Bankers Association (MBA) reported slightly higher purchase and slightly lower refinancing applications. The Purchase Index gained 2% to 334, while the Refi Index declined about 1% to 5438. The decline in the Refi Index was somewhat surprising given the near record low level in mortgages over the period. Analysts from Salomon Smith Barney suggested the long President's Day weekend may have had some impact. Meanwhile, analysts from Lehman also attribute the limited response in refis to the reduction in the premium universe due to paydowns and burnout.
For the week ending Feb. 21, mortgage rates declined again, according to Freddie Mac. Rates are now at new record low levels. The 30-year fixed mortgage rate declined two basis points from the previous week to 5.84%. The 15-year fixed mortgage rate fell five basis points to 5.21% and the one-year ARM reported in at 3.81% versus 3.89% in the previous survey.
All set new records. The previous records were 5.85% and 5.24% for 30- and 15-year rates, respectively, previously set the week of Jan. 2. The previous record for ARMs was 3.89%.
This should keep mortgage applications strong and prepayments near record levels for several months. Given the strength of the Refi Index in January, and rates holding below 6% for several weeks, some analysts predict speeds to increase in February after slowing slightly in January.
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