Credit Suisse First Boston today shifted its view on the mortgage market to neutral from overweight, due to potentially unfavorable year-end technicals and the recent tightening of already stretched mortgage valuations. However, CSFB analysts do not suggest an underweight based on the even tighter valuations on comparable alternatives including corporates and CMBS.
CSFB added that its overweight recommendation in the past several weeks was based mainly on favorable demand technicals and contained projected supply because of limited aggregate refi exposure. CSFB analysts noted that they have been among the minority on the Street in suggesting an overweight stance, which has performed well, to date.
However, these positive factors might be "unraveling," said the firm. The approach of year-end will probably lessen investor demand due to bookkeeping considerations. Aside from this, the basis has continued tightening from already stretched valuations despite a slight rise in refi exposure following last Friday's payroll report induced rally.
Market durations are short for the current level of rates, also report, consistent with a modest rally scenario. Additionally, a sharp back-up in interest rates is expected to cause meaningful extension, particularly in premiums.