The lack of economic data last week as well as the upcoming Federal Open Market Committee meeting kept volume on the lighter side. The most active participants were fast money and servicers, who were generally selling lower coupons to move up. Originator selling, meanwhile, was close to average on the week with supply focused in 6s and 6.5s. Although the supply was uneventful, it was weighing on the market with many buyers sidelined.
Finally, the higher yields did start to draw in some Asian investor buying. Although it was light, the market was encouraged by their appearance. Meaningful support from this group, however, is not expected until there is more clarity regarding future Federal Reserve action. Additionally, there is concern that the Bank of Japan's plan to move from its zero interest rate policy would strengthen the Yen, and would further derail Asian MBS buying, RBS Greenwich Capital analysts said last week.
The limited support and better selling eroded performance gains in mortgages last week. Excess return versus Treasurys on the MBS Index month to date through June 21 was one basis point over, down from five basis points over through June 16. Year-to-date, the MBS Index is up 37 basis points, according to Lehman Brothers.
Mortgage sentiment is neutral to positive at this time. Advantages include expectations for long-dated volatility to decline, high nominal yields, a flight to quality bid if credit performance starts to decline, and a pick-up in demand when the Federal Reserve concludes or is perceived to stop its rate hike campaign. Near-term risks include higher volatility on both the Federal Reserve data-dependency and global risks.
Current preference is in 15-year 6s, which are benefiting from a limited float that is keeping dollar rolls strong. Last week, Lehman analysts cited the recent strength of the roll as a result of trying to entice holders of seasoned pools to roll the coupon. They added that it is also likely to be the target of hybrid pipeline hedges and that production in the coupon will not be sufficient to cause major deliverable shifts until possibly early fall. Because the risk is the deliverable will be more seasoned than expected, Lehman says investors should continue to hold a core position in the coupon.
Refi Index drops 2%
Mortgage application activity slipped less than one percent overall, according to the Mortgage Bankers Association's latest survey. For the week ending June 16, the Refinance Index declined 2.2% to 1466.1, while the Purchase Index was virtually unchanged at 414.8 compared to 414.6 the previous week. Over the period of the survey, mortgage rates increased slightly with the 30-year mortgage rate averaging 6.63% versus 6.62% in the previous report.
As a percentage of total application activity, refinancings were little changed over the week at 35.5% versus 35.70% previously. ARM share was down slightly to 29.6% form 30.7%. Based on dollar volume, the refinancing share slipped to 37.7% form 38.0%; ARM share was also slightly lower at 43.20% from 44.60%.
Mortgage rates jump in
latest FHLMC survey
For the week ending June 23, mortgage rates jumped, according to Freddie Mac's latest survey. The 30-year fixed mortgage rate rose to 6.71% from 6.63%, and is at its highest level since May 31, 2002 when it averaged 6.76%. A year ago, 30-year mortgage rates were at 5.57%.
Meanwhile, 15-year mortgage rates surged 11 basis points to 6.36%, also the highest it has been since mid-Spring 2002. Rates are up 120 basis points from a year ago. On the adjustable side, both 5/1 hybrids and one-year ARM rates gained nine basis points to 6.32% and 5.75%, respectively. The one-year ARM rate is at its highest level since early August 2001 when it averaged 5.77%, Freddie Mac stated.
Frank Nothaft, Freddie Mac's chief economist, attributed the jump in rates to expectations that the Federal Reserve will not pause in June, but will be raising the funds rate again at its August meeting on concerns about inflation.
Mortgage application activity is expected to have declined this week on the large increase in rates. While the Refinance Index has been generally stronger than expected, analysts believe the index will start responding in a more traditional manner to higher rates when adjustable-rate products become a less attractive alternative.
Prepayment outlook
June prepayments on FNMA 30-year MBS are expected to be flat to slightly weaker overall, while GNMAs are expected to increase less than 5% for 5.5% and lower coupons, and hold unchanged in higher coupons. Offsetting favorable seasonals are slightly higher mortgage rates and slightly lower refinancing activity on average over the period influencing the report.
Looking ahead to July and August, speeds are forecasted to drop about 10% in July on a lower day count and recover in August on a higher day count.
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