Deutsche Bank Securities analysts favor being long the basis currently given the Federal Reserve's support of the MBS market.
The Fed's strong buying in 30-year 5s and 5.5s in the second half of this year has resulted in extremely tight levels in these coupon, analysts noted, while the wings — 4.5s and 6s — have lagged in large part to "lack of consistent sponsorship." They believe this trend will continue, and so they suggested being long the superfly (long 5s, long 5.5s, short 4.5s and short 6s).
Deutsche analysts said the 5s fly recently came off its peak due to bank selling in 5s and apathy from the Fed as it turns its focus back to 5s on any dips. Meanwhile, the 5.5s fly has remained strong.
Analysts calculated the carry on the superfly is at 1.5 ticks (1.5 ticks on the 5s fly and flat carry on the 5.5s fly).
While the flies are rich by 9.5 and 10.5 ticks, respectively, based on the rule that flies should trade at 3xcarry + 12, analysts believe the technicals overwhelm fundamentals.
"We are looking for quarter of a point profit on this trade from current levels," analysts wrote.