Steady, but light two-way flows characterized last week's mortgage market. Mortgage banker selling averaged less than $1 billion per day. In addition, modest selling was seen by servicers and hedge funds. All of the selling was focused primarily in 5.5s. Buyers were wide-ranging and were interested primarily in the lower coupons and 6.5s. In addition, indexers were expected to be active on Thursday and Friday. According to Lehman Brothers, the MBS Index is expected to rise 0.16 years on June 1 due primarily to paydowns.
Over the past week, spreads leaked out one basis point on 30-year Fannie Mae 4.5s through 5.5s, and three to four basis points for 6s and 6.5s. Meanwhile, 15s lagged 30s with spreads widening three to five basis points.
This week, activity is anticipated to remain choppy, especially with the employment report looming. Meaningful buying is not expected until the 10-year Treasury backs up to around 4.85% to 4.95%, suggests RBS Greenwich Capital.
For now, analysts remain mostly neutral to slightly positive on the mortgage sector due to the strong carry. The sector may also have a near-term advantage from the upcoming employment report. In research, UBS notes that in the past few months "there's been a very discernable pattern of mortgages leaking wider going into the employment number (investors sought to buy volatility, and view selling mortgages as an economic way of buying volatility going into a major number). Mortgages then tightened immediately thereafter, as investors sought to unwind the trade." UBS believes a repeat of that scenario is probable.
Countrywide Securities, however, is slightly more negative then they were in previous weeks, citing weak demand from banks and no other parties (i.e., the GSEs) ready to pick up the slack. Bear Stearns also noted that recent tightening combined with politics has pushed the GSEs back to the sidelines.
Mortgage application
activity continues to slow
The Mortgage Bankers Association (MBA) reported that for the week ending May 21, the Purchase Index slipped 1% to 450, while the Refi Index declined nearly 7% to 1695. This was in line with analysts' expectations. As a percentage of total application activity, refinancings were 36.2% versus 37.4% previously. ARM share also fell to 34.6% from 35.2%.
Fixed mortgage rates increased slightly
Freddie Mac reported slight increases in fixed-rate mortgage rates for the week ending May 28. This was expected. Both the 30- and 15-year fixed-rate mortgage rates increased two basis points to 6.32% and 5.69%, respectively. Meanwhile, the one-year ARM rate dropped 12 basis points to 3.87% from 3.99%. Looking ahead to this week's mortgage application activity survey, JPMorgan Securities says it expects the Refi Index to be down slightly going into the Memorial Day weekend.
Since March 18, 30-year rates have gone up 94 basis points and the Refi Index has plummeted 66%. As a result, the next three prepayment outlooks anticipate sharp declines in speeds. The table on this page gives the current consensus forecast. The next prepayment report covering May data will be released late Friday, June 4.
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