Barclays Capital analysts turned to overweight from underweight on the agency MBS basis.
On the other hand, Bank of America Merrill Lynch analysts suggested for investors to maintain their underweight in agency MBS.
In a report released today, Barclays analysts said they would typically hesitate from making such a sudden shift, in this case to overweight from underweight. However, since they had moved their recommendation to underweight on Aug. 10, the basis has widened significantly.
At current market levels, analysts said that lower coupons are at wider spreads than at the end of the Federal Reserve purchase program.
They said the magnitude of basis underperformance over the week, "forces our hand."
Additionally, analysts cited Chairman Barney Frank's (D-Mass) recent interview where he said that there is no imminent government plan to induce a refinancing wave. This statement from Frank should lessen the speculation surrounding this issue, the analysts said.
"While we continue to expect the basis to trade directionally with rates, we think the recent widening in spreads will be met sharp uptick in investor appetite," Barclays analysts wrote. "With money managers currently underweight MBS, we expect that this is an opportune time for them to cover some of their underweight."
They added that at these levels, they expect increased sponsorship from overseas buyers as well as banks.
And although both economic and housing data have weakened in recent weeks, according to analysts, the loss-adjusted valuations on non-agency MBS are still at levels where they are remaining overweight the sector.
If loan put-backs become a factor in the non-agency space, they said that the sector should look even more attractive.
Barclays analysts suggested for investors to go into lower coupons, as they expect demand to be
concentrated in this part of the stack. They are still cautious on higher coupons, initiating
their overweight position in FNMA 4s versus the swap curve.
Meanwhile, BofA Merrill analysts said that the yield curve's continued bull flattening is "the elephant in the room" for agency MBS, suggesting that investors should stay underweight in the agency MBS basis.
They added that the sector's OAS widening makes it appear attractive, although they think it does not account for the considerable risk that the market is on the cusp of a Fed-induced refinancing wave.
