While mortgage bond investors benefited from a dearth of net issuance during the first quarter, the supply drought may be coming to an end.

The Mortgage Bankers Association purchase applications index reached its highest level since April 30, 2010, according to data released this morning.

A combination of rising home prices with a greater number of purchases would cause the creation of more mortgage-backed securities. So as more people reach for the “American Dream,” the higher net supply may cause heartburn for mortgage investors.

Despite seeing just $34 billion in net issuance during the first quarter -- compared to $56 billion and $99 billion during the same periods in 2018 and 2017 -- the coming home buying season and the recent rate rally “should lead to more robust net supply figures in the quarters ahead,” according to Bank of America Corp. Last year saw $281 billion in net issuance, analysts at the bank wrote in a recent research report.

In addition to this organic net supply, the roll off from the Federal Reserve’s balance sheet, which has just under $1.6 trillion MBS remaining from its quantitative easing purchases, is likely to ramp higher should the recent rally in rates spark refinancing activity. This roll off needs to be absorbed by private hands. Having averaged about $15 billion per month during the first quarter, FTN Financial’s MBS analysts see it exceeding the Fed’s $20 billion per month cap until October, according to a recent report.

Mortgage credit availability is also on the rise, helping would-be buyers take on more debt to handle the rising cost of housing. The Mortgage Bankers Association reports that index increased for the third straight month in March and is up 2.3 percent from one year ago. At current levels it sits close to a decade high.

Should supply ramp up, the most vulnerable mortgage-backed securities in the 30-year conventional stack are likely the 4 and 4.5 percents, particularly the former, as they both are the favored production coupon at current rates. During the first quarter, they saw net supply of $20 billion and $10 billion, respectively, according to Wells Fargo & Co. data.