While a majority of the fixed-income and equity markets have recovered from their price weakness, a new report by Amherst Securities Group (ASG) analysts finds that there are still considerable price drops across all the sectors of the securitized products market.
Following the initial decline in May and June of the fixed-income and equity markets resulting from macroeconomic issues and the Greek crisis, most of these sectors have managed to recover by the end of the quarter, according to ASG analysts.
However, securitized products are still struggling to recover. To illustrate, over the period from 4/15/11, the price drop on the mezzanine index CMBX.3.AJ fell 12.7%. Additionally, senior ABX bonds ABX 06-2 PAAA fell 4.0%.
In the report, analysts looked across the non-agency universe to see where relative value lies. "With the sell-off, some bonds have swung from 'rich' to 'fair', while others migrated from 'fair' to 'cheap'."
Within these sectors, they said that last cash flow subprime that goes pro rata has deteriorated significantly, which has resulted in the securities moving from 'fair' to 'cheap' on a relative value basis.
Analysts attributed the price decline in non-agency mortgages to the general widening of risk premiums, mortgage technicals given the pressure from, among other things, the Maiden II sales, and deterioration in mortgage fundamentals because of the double dip in housing. They also noted that the synthetic markets have partly recovered while the cash markets have essentially not risen from their quarter-end lows.
However, they said that as quarter-end pressures faded, and other markets recovered, analysts have seen very limited recovery in non-agencies, which they characterized as mispriced versus other asset classes.
ASG analysts said that non-agency MBS securities have considerably underperformed versus other asset classes. They noted that lower-dollar-price securities backed by "sloppier" collateral or structures have considerably underperformed their higher-dollar-price equivalents that are backed by better collateral and structures.
"Technical selling pressures are substantially lower after quarter end, and the housing numbers that will print over the summer will appear brighter," analysts said. Because of these, analysts think it is unlikely that non-agency MBS will continue to underperform versus other sectors, and that sloppier cash flow will still underperform their higher-quality counterparts.
They said that the last cash flow subprime is the single worst performing sector in non-agencies, with prices falling 15% to 20%. These have dropped more in price than any other structures. These securities, ASG analysts argued, currently provide good value
More generally, analysts said that mortgage investors should consider these "beaten down" sectors. They said that even though these securities have moved from 'rich' to 'fair', many have moved from 'fair' to 'cheap'. They argued that selecting securities from beaten down sectors with special attention given to security-specific characteristics should give "outsized returns" in the future.