Last week, mortgage flows were modest as investors evaluated to the strong performance the sector put in the previous week. In that week, there was heavy originator selling, but this was more than met by active buying from all investor types. Last week, however, originator selling was very light and investor activity was mainly focused on roll activity related to settlement on 30-year conventionals and 15-year MBS.

While the strong performance of the sector gave some pause to flows, a heavy corporate calendar also contributed to the lack of interest. High-grade issuance for the week was expected to total around $24 billion, $11 billion of which was the upsized GECC corporate deal. The issue was originally sized at $6 billion, but favorable conditions and strong investor interest encouraged the resizing. The interest in corporates could become worrisome for mortgages as it will draw funds away from the MBS sector.

Another factor affecting mortgages last week was the high expectation of additional convexity selling. This hadn't occurred as of press time as Treasury prices were generally higher.

Over the Wednesday-to-Wednesday period, spreads in Fannie Mae 30-year MBS were seven to twelve basis points tighter, and three to eight basis points firmer in 15s. All of this tightening occurred in the week ending March 8. The lack of activity this week resulted in some give back of two to four basis points.

Supply Outlook

According to Countrywide Securities Corporation, conventional issuance in February totaled $92.3 billion, down 5.3% from January's total. Net issuance in 30-year conventionals totaled $25 billion in February, 26% higher than in January. Net 15-year issuance, however, fell about 8%, says Countrywide, to $18.5 billion. Looking forward, they believe it is reasonable to expect that gross 15-year production will continue to fall, especially if rates rise and refinancing activity declines which is expected. As a result, 15-year 6s should see lower net production. As this is a key coupon for that sector, Countrywide expects the technical situation in 15s should improve markedly.

Mortgage indexes

The Mortgage Bankers Association reported that its Refi Index dropped 24% to 1783, while the Purchase Index was down 6% to 315 for the week ending March 8. As a percentage of total applications, refinancings fell to 46.3% versus 51.7% in the previous report.

The decline was generally in line with expectations given the sharp increase in rates over the past week. According to Freddie Mac's Primary Mortgage Market Survey, fixed mortgage rates jumped over 20 basis points for the week ending March 15. Specifically, 30-year fixed mortgage rates gained 21 basis points to 6.87% and 15-year fixed mortgage rates rose 22 basis points to 6.59%. This is the highest rates have been since Jan.3, when 30-year rates were 7.14% and 15-year rates were 6.62%. One-year ARM rates were virtually unchanged at 5.08% versus 5.07% in the previous report.

Salomon Smith Barney notes that since much of the increase in rates occurred at the end of the March 8 week, it expects further declines in refi activity this week. Based on the index's recent performance, Salomon predicts speeds to decline in the summer following modest gains in the spring. The firm predicts 6.5s to slow to around 20 CPR and 7s to 30 CPR.

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