Home Loan Rate, Lowest Since September, Pressures Mortgages
Lower mortgage rates combined with a higher refinance index indicates that prepayment speeds are likely to increase.
The Freddie Mac 30-year mortgage rate has dropped to 3.51%, its lowest level since Sept. 5, increasing pressure on a sector that was already set for its worst monthly performance for January since 2016.
A key feature of mortgage-backed securities is the fact that the underlying home loans may be prepaid by borrowers at par at any time. With almost the entire MBS universe changing hands at a premium, getting back funds faster than expected can hurt performance.
Lower mortgage rates combined with a refinance index at its highest point since Aug. 16 — which forewarn that prepayment speeds are likely to increase — and Treasury yields that have fallen due to concerns over the coronavirus, have sent the Bloomberg Barclays U.S. MBS index excess return down to -0.37% as of Wednesday’s close.
Should that level hold through Friday, it would be the worst performance for the month of January since 2016, which saw -0.39%. Poor relative performance in January is not out of the ordinary, though — since 2010 its average excess return of -0.13% follows only August (-0.15%) for the worst month of the year.
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