The outperformance of mortgage-backed securities versus U.S. Treasuries has extended for a third straight month into November, buoyed in part by a decline in volatility. It’s now the longest run of consecutive monthly outperformance since the September through December period of 2017.
The Bloomberg Barclays U.S. MBS index excess return versus Treasuries closed the month of November at 19 basis points, bringing the year-to-date total to 20. Combined with the positive excess returns seen in September and October, the 52-basis-point tally is the best over a three-month period since September of 2016.
A drop in volatility has played its part. Since closing out August at a year-to-date, month-end high of 86 basis points, it has steadily dropped to see out November at 62, well below its trailing five-year average of 69 basis points. This benefits mortgage investors because lower volatility decreases the chance a homeowner may find it makes sense to refinance a home loan. And with most mortgage-backed securities trading at a premium, an earlier than expected return of principal would not be welcome.
This has happened in tandem with refinance activity tapering off slightly over the last three months, with the aggregate index dropping about 4% since the end of August. Freddie Mac’s latest 30-year mortgage rate report showed a rise to 3.68%, a 10-basis-point increase since the end of August.
The upcoming November prepayment speed report is expected to show a decline of about 11% from the previous month, while forecasts call for the 10-year Treasury yield to end the year at 1.71%, just 13 basis points below its current level.