Even with the GSEs struggling with accounting issues and potential accounting regulations hitting banks, supply and demand dynamics in the MBS market have not gone haywire. In fact, MBS spreads have remained "stubbornly tight," analysts said.
In a recent report, Bear Stearns said that the likely cause of tight spreads is a lack of supply. "If current trends continue, net supply of fixed-rate MBS will be negative this year for the first time since 1990," analysts wrote. "A shrinking fixed-rate market may continue keeping spreads tight." Analysts noted last Tuesday that the LOAS on par 30-year paper is now at minus five basis points, which is three tighter than the beginning of 2004.