Mortgages were supported by good buying from a variety of accounts last week as investors stepped up to take advantage of recent widening. The focus was primarily in the lower coupons due to the cheaper levels and concern of increasing supply in the higher coupons. Also of note has been increased trading in specifieds. This is not too surprising, as analysts have been touting the sector given current cheap pay-ups.

Also, Ginnie Maes were seeing increased flows last week. One trader attributed this to the roll coming off in Fannie Mae 5s, the fact that 6s are under selling pressure and the GSE headline news.

Over the Thursday-to-Wednesday period, spreads on 30-year Fannie Mae 4.5s tightened by six basis points on an OAS basis, 5s and 5.5s are in one basis point, and 6s widened six basis points. In 15s, spreads were two and one basis point better for 4s and 4.5s, while 5s were unchanged.

Supply is down to $1 billion per day on average. JPMorgan Securities said that fixed-rate supply in April is running only 5% to 10% higher than March levels, but paydowns are likely to be 30% to 40% higher. This suggests April fixed-rate agency paydowns could exceed $115 billion for the month resulting in net issuance of negative $35 billion, the firm calculates. "It now appears that the pace of the decline may accelerate in the second quarter, as the ARM market gains market share," researchers wrote in their mid-week report.

Last week was month-end. However, duration extensions in most sectors - including mortgages - were the lowest so far this year. According to Lehman Brothers, the MBS Index was expected to lengthen 0.07 years. The U.S. Treasury Index was estimated to extend just 0.01 years; the U.S. Agency Index, 0.04 years; and the Credit Index, 0.04 years. Overall, the Aggregate Index is forecast to extend 0.05 years.

Mortgage application activity holds firm

Despite increases in mortgage rates, mortgage application activity held firm for the week ending April 23. According to the Mortgage Bankers Association (MBA), the Purchase Index rose 7% to 464, while the Refinancing Index declined just 6% to 2403. As a percentage of total applications, refinancings were 44% versus 47.3% previously. ARM share rose to 32.7% from 31.7%.

For the week ending April 30, Freddie Mac reported that 30-year fixed rate mortgage rates rose seven basis points to 6.01%; 15-year rates gained 10 basis points to 5.35%; and the one-year ARM rate increased to 3.75% from 3.69%.

JPMorgan expects this week's activity to hold firm and predicts the Refi Index will stay above 2000 due to strong ARM activity. With the strong purchase activity, analysts predict that speeds on 2003 5s will remain elevated into the summer. JPMorgan expects the vintage will prepay at around 14% CPR in April, slow to 10% to 12% in May and increase to 13% to 14% CPR in the summer.

In terms of prepayment expectation from other firms, April is expected to be the peak month for the current refi wave, said analysts from Citigroup Global Markets. Expectations are for aggregate speeds to be at about 33% to 34% CPR, which is approximately a 20% rise relative to speeds in March. The increase expected for April should reflect lower mortgage rates seen in March as well as a 5% to 10% increase in turnover seasonals, although a 1.5-day dip in day count may marginally counteract these factors. Citigroup expects May speeds to drop by about 25% to 30%, corresponding to aggregate speeds of 23% to 24% CPR. Cuspy coupons are expected to decline the most in a selloff, as is usual under this scenario.

Existing home sales

still strong

The National Association of Realtors (NAR) reported last week that existing home sales rose in March by about 6% on a seasonally adjusted basis. However, sales (on a marginally adjusted basis) remain slightly less than their peak in September but are still considerably over levels seen a year ago, which Citigroup said is a reflection of the robust housing market.

On a non-seasonally adjusted basis, March home sales jumped by 41% month-over-month, which is roughly in line with historical precedent. For MBS buysiders, seasonally adjusted existing home sales are less relevant in terms of prepayments compared to the non-seasonally adjusted numbers, Citigroup added.

In a separate report from RBS Greenwich Capital, analysts said that it has become apparent that housing activity was hindered by the winter weather, and the spring will witness an explosion in construction and sales. "Of course, the momentum will wane somewhat as mortgage rates rise and pent-up demand is satisfied, but better employment and income trends should hold to maintain solid interest in homes for the foreseeable future as long as borrowing costs remain low by historical standards," said researchers at RBSGC.

Copyright 2004 Thomson Media Inc. All Rights Reserved.

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