With the MBA Refi Index at a whopping 1572.1 last week (see story, p.1) and prepayment risk encroaching, prudent participants in the MBS world were rolling down in coupon and looking to seasoned issues and structured product for convexity, sources said.
"Structure and collateralized mortgage obligations are a place to hide," said one investor. "There have been three CMO deals announced over the last 24 hours. Mortgage originators are selling, and supply is coming in, but this is certainly not the easiest of times. And we're probably in for some tougher times."
One trader noted that par bonds could not stay on the shelf: he saw a 7.75% coupon and a 7.5% coupon trading at the same dollar price. This immense par compression is due to the preponderance of activity going into refis, he said.
While the acute steepening of the yield curve had provoked up-in-coupon trades in recent weeks, the prepayment effect will counteract any yield-curve effect, sources said. One researcher noted that a 1% increase in constant prepayment rate (CPR) wipes out even a 100 basis-point steepening of the curve. So while there is a fair amount of opportunistic up-in-coupon trading happening, the most nimble of investors should move into the world of structured product before the shockwave of prepayments begins, sources said.
Meanwhile, Credit Suisse First Boston is estimating that net fixed-rate agency supply in 2001 should be below that of 2000, as equity take-out declines. With rates at current levels, CSFB expects about $600 billion in gross fixed-rate issuance in '01, or a 50% increase from '00. The most likely scenario is a number between $400 billion and $500 billion, however.
Last week, Ginnie Mae securities led conventionals; the sector is seeing support from overseas buying on the prospects that prepayments will be slower than conventionals. With Ginnie Mae speeds already expected to exceed that of the GSE collateral, some accounts are more comfortable with the pricing-in of those assumptions and these accounts continue to buy paper.
CMBS: World Trade
The commercial mortgage-backed market was still quiet last week, with many players still at the CMSA conference in Miami, but as of press time there was a triple-A bid list expected for Friday morning.
One issue, LBCMT C4 X, in the amount of $205 million, had a weighted average life of 9.2 years, with price guidance between 385 and 395 over Treasurys; another issue was LBCMT 1999 C2 X, for $117.8 million, with a WAL of 8.6 years and guidance between 386 and 395 over.
Also last week, GMAC Commercial Mortgage Corp. circled the B-piece of the upcoming $1.2 billion conduit from Bear Stearns, Wells Fargo, John Hancock Mutual Life, Principal Life and Morgan Stanley Dean Witter - firms that are planning to team on several more large deals over the course of 2001.
Single-asset deals for trophy properties are on the radar screens of CMBS participants: not only is Goldman Sachs planning to securitize approximately $1.2 billion in debt on New York's Rockefeller Center in the second quarter, but the impending sale of the World Trade Center will be accompanied by a mega-securitization, noted one CMBS insider.