Last week saw relatively quiet trading conditions with many participants out for the Thanksgiving break. Mortgage flows were mixed in the only two full trading days - Monday and Tuesday - with Monday seeing better buying and Tuesday, better selling. In general, Asian investors remained steady buyers in the overnight sessions, while domestic activity included servicer, some banks and other real money investors. Interest remains centered in the belly of the coupon stack. Weighing particularly on Tuesday's session was above average originator selling - over $1.5 billion focused in 5.5s and 6s.
Month to date through Tuesday, Nov. 21, mortgages have recorded an impressive performance. According to Lehman Brothers, the MBS Index is up 32 basis points versus Treasurys, and brings year to date excess returns to 120 basis points. This compares to 103 basis points year-to-date on the U.S. Credit Index, 83 basis points over for ABS, and 139 basis points over for investment grade CMBS.
Analysts' tone remains positive despite the strong performance the sector has experienced in November. JPMorgan Securities, for example, is holding with an overweight recommendation, particularly in current coupons. Analysts noted expectations of declining volatility and good support from Asian buyers. The market, they added, has focused on 4.55% on the 10-year as the trigger point for the market. However, they estimated it will take a more sizeable rally before there should be real concern as this would ignites 5.5s - and that is around 40 basis points away.
Deutsche Bank also maintained its modest overweight, in part because of consistent investor demand. Countrywide Securities analysts also noted the range bound market and decline in volatility is supportive for mortgages. They recommended selling 6s versus the intermediate sector of the curve, however, if FNMA 6s reach 100 26-28, as they will become more difficult to hedge. This coupon is currently at 100 25+.
More bank de-levering?
Last Monday, Fifth Third Bancorp announced a strategic shift in the composition of its balance sheet. In particular, the bank intends to sell $11.5 billion of its "available for sale" securities by year-end. Those securities, have a weighted average yield of 4.30%, the firm said. Shorter duration securities such as CMOS, ARMs, and 15-year MBS are expected to be sold. Fifth Third anticipates a pre-tax loss of approximately $500 million, or around $325 million after-tax.
This follows last month's announcement from Bank of America that it was reducing its securities holdings by $100 billion over the next couple of years. A substantial portion of this has been sold already.
Application activity lower despite decline in rates
Mortgage application activity was down 3.7% overall for the week ending Nov. 17 despite a nine basis point decline in the 30-year fixed mortgage rate to 6.24%. In fact, in a report from Countrywide Securities analysts had reported their refinance activity had jumped 15% in that week in response to the improved rate environment.
According to the Mortgage Bankers Association, the Purchase Index slipped 2.8% to 401.4, while the Refinance Index was down 4.3% to 1935.3.
It should be noted that there was a 1/2-day adjustment made for the Veterans Day Holiday in the previous report from the MBA. Countrywide Securities said this overstated the number, and that the unadjusted number of 1820 was probably more representative of real activity for the week ending Nov. 10. From this level, the Refinance Index rose 6% in the most report.
So far in November, the Refinance Index has averaged 1952, up nearly 10% from October's average. Mortgage rates are averaging seven basis points lower at 6.29%.
Speeds in November are expected to slow 3% to 4% on average with discounts showing larger percentage declines - around 6% - versus par and premiums - about 2%. Factors influencing the report include slowing seasonals and one less collection day. On average, the Refinance Index was up less than 2% in October versus September; 30-year mortgage rates averaged just four basis points lower.
Looking ahead to December and January, speeds are expected to slow about 6% each month.
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