For the week ending June 22, bank MBS passthrough holdings rose $54 billion, partially reversing the prior week's dip.
Analysts from JPMorgan Securities said it would seem that banks took quarter-end gains for June settlement, representing the $64 billion sold in passthroughs the previous week, but bought back securities for the same month. They reported that they have never observed such large swings in monthly bank holdings, adding that the last time something like this happened was in 2003 when banks sold passthoughs and bought back CMOs for quarter end. What sets this transaction apart, however, was that it was much bigger and was done entirely in passthroughs.
JPMorgan said that the only plausible explanation for the gain is that 30-year 5s were sold and bought for June to take profits. The analysts ruled out an earlier theory of a down-in-coupon swap, as this would have dampened gains. Similarly, JPMorgan struck down the idea that up-in-coupon swaps was responsible, noting that the June megas were all in 30-year 5s.
JPMorgan concluded that banks were net MBS sellers for June, adding that the May 30-year 5 megas will be delivered TBA in July, since these could not be delivered in June to avoid a wash sale. Finally, analysts said that the outlook for the FNMA and Gold 5 rolls remains poor with no net bank buying and poor TBA quality.