The strong start to the New Year is continuing in mortgages, though Tuesday last week did see a heavy sell-off that raised questions of whether the tone had shifted. Mortgage flows were strong and two-way. Monday got the week off to a good start as December paydowns -totaling over $40 billion - were reinvested. The strong gains encouraged profit-taking as the day progressed and it picked up steam on Tuesday with real and fast money as well as servicers jumping in with the strong sell-off in Treasurys due to heavy corporate supply and mortgage-related selling. This brought fears that maybe the positive tone in mortgages since the start of the year had shifted, but the cheapening led to active buying on Wednesday as the market held stable, particularly from servicers adding duration and from overseas. The buying was continuing into Thursday's session with central bank and fast money support. The early year and week flows were up in coupon, but that shifted down in coupon following Tuesday's sell-off.
Originator selling continues to be uneventful with supply averaging less than $1 billion per day. Also supportive for mortgages has been the continued low vol environment. The near- term outlook remains favorable. In midweek comments, JPMorgan Securities analysts are holding with their tactical overweight due to lower vol, firming rolls and overseas buying -which they believe should help support the near-term tightening. They also don't expect a turnaround before February. UBS remains a modest overweight on the mortgage basis. They expect foreign and crossover buying should offset the increase in net supply.
In their weekly MBS Strategy report, RBS Greenwich Capital analysts are recommending a neutral weighting. They note that January is typically a slightly positive month for mortgages with most of the gain earned in the first week of trading. The rest of month has traditionally experienced some retracement, often in the third week, analysts say. Bear Stearns is neutral to negative on expectations of higher supply and limited demand from banks and GSEs. Finally, Lehman Brothers increased their mortgage short. They don't believe the sector can continue to tighten on a further rally. One reason is the potential for increased ARM-to-fixed refinancings.
Application activity moves higher
Mortgage application activity picked up in the first week of January. For the week ending Jan. 6, the Refinance Index rose 10% to 1498, according to the Mortgage Bankers Association. This was in-line with expectations. As a percentage of total application activity, refinancings were down slightly to 42.2% from 42.7% in the previous report. ARM share was also down slightly to 28.1% from 28.8%.
Mortgage rates declined again for the week ending Jan.13, according to Freddie Mac's latest survey. Freddie Mac's Chief Economist Frank Nothaft, attributed the further drop to "some economic data releases that pointed towards more subdued inflation in the near term."
The 30-year fixed rate mortgage rate averaged 6.15% versus 6.21% last week. This is the lowest they've been since the week ending Oct. 28, 2005, when they also averaged 6.15%. Since hitting a near-term high of 6.37% in mid-November, mortgage rates have retraced 22 basis points.
Also reported, 15-year fixed rates slipped five basis to 5.71%; 5/1 hybrid ARMs were down two basis points to 5.76%; and the one-year ARM rate was little changed at 5.15% versus 5.16% previously.
With mortgage rates holding steady to slightly lower, expectations are for mortgage application activity to hold around the 1500 area, and possibly move towards 1600 in this week's MBA report.
December prepayment reports match expectations
December FNMA prepayment reports came in pretty much as expected with a couple of exceptions. One was 2003 4.5s and 2003 5s which declined 13% to 14% versus expectations of 7% to 8%. The other was 6.5s that declined less than expected. Lehman suggests the limited decline in the higher coupons was due to delayed response from borrowers to the rate backup in September and October.
In comments from Bear Stearns' Senior Managing Director Dale Westhoff, he observed that the aggregate speed on FNMA collateral is at its lowest level in five years at 13.8% CPR. The last time the aggregate speed was below 15 CPR was in January 2001.
Speeds on GNMAs were a bit more mixed with 2004 vintage 5.5s and 6s slowing just 2% to 3% versus expectations of 14% to 20%. Meanwhile, 5.5s generally slowed less than expectations, while 6.5s declined more than expectations. GNMA speeds continue to be much faster than conventional cohorts.
Paydowns totaled around $42 billion, according to JPMorgan. Net fixed rate issuance grew $21 billion with 30s up $25 billion and 15s declining $4 billion, analysts add.
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