CMO activity remains strong and has picked-up significantly in Golds, said a JPMorgan Securities report released on Friday. Nearly $11 billion in Gold 5s CMOs priced in July. Some industry participants are referring to this event as Freddie Mac’s “revenge.”
JPMorgan stated that the Gold 5 roll is now 1/8 higher compared to the FNMA roll for July/August and the Gold/FNMA 5 swap closed positive for July settle. The float in Gold 5s is slightly above $30 billion through the end of June (net of CMO issuance). And the float has doubled this month, which is more than $18 billion in Gold 5s.
Further, analysts said that issuance is also increasing for July and especially August, as Gold execution improves. The Gold/FNMA 5.5 swap has not kept in line with the sell-off and remains at negative 6/32s. This shows the strong dependence of Gold/FNMA swaps on Gold CMO execution. Researchers said that there has only been one Gold Trust IO/PO issued so far this year and Gold 5.5 IOs still trade almost two points behind FNMAs, adding that there are no Gold Trust 5% IOs. They believe that Gold speeds will be accelerating more rapidly than FNMAs in June but will probably be converging by August.
However, Gold IOs continue to trade poorly, said JPMorgan. Analyst find it interesting that a far larger percentage of FNMA Trusts have been used to back REMICs compared to Gold Trusts. In fact, they said that nearly a quarter of FHS-224 Trusts have actually been recombined back into collateral (and a third were used to back CMOs).
To compare, JPMorgan stated that more than half of the FNS-332s were used to back CMOs. Researchers think that it is fair to interpret the greater share of FNMA Trusts used to back collateral as a sign of the higher perceived convexity of the FNMA collateral.