Deutsche Bank Securities analysts expect President Obama's housing plan to boost prepayments substantially.
Specifically, they believe the 6% and 6.5% coupons are likely to be affected the most. This is why they recommend underweighting these coupons versus the rest of the stack. They also recommend investors to consider taking profits in the up-in-coupon trade because of its recent richening.
Given their outlook for a pickup in conventional prepayments, which should lead to a compression in the difference with GNMAs, Deutsche analysts are now positive on GNMA/FNMA swaps.
They noted that GNMA/FNMAs have been hurt on a combination of supply and faster speeds. But, as the refi incentive in the housing plan works only for FNMA and FHLMC Golds, they believe the GNMA supply reduction could be substantial.
Ahead of the President's program, GSE issuance had picked up with February's market share for GNMAs declining to 27.3% from 41.8% in January. "On balance," Deutsche said, "we would overweight GNMAs, particularly premiums."
Another prepay-protected investment analysts suggested was 2003-2005 vintages. They pointed out that borrowers who were rate sensitive during the 2003-2005 period chose ARMs, so those fixed rate borrowers are less responsive to rates.
This is supported in prepayment data, and analysts believe this behavior will continue. They added that payups for seasoned collateral have come off due to supply and the recent sell-off "would provide attractive call protection."