In a report this morning, Deutsche Bank Securities recommends buying GNMA 6s versus a combo sale of GOLD 6s and 5.5s to take advantage of recent GNMA cheapening.

The firm said that by taking a position in GNMAs vs. GOLDs, buysiders can take advantage of the differential in prepayment speeds, which is likely to widen if rates stay low. Investors can also benefit from the OAS cheapness of GNMAs. Nothing that the GNMA 6 duration is nearly halfway between the GOLD 5.5 and 6 duration, Deutsche recommends investors buy GNMA 6s while selling equal parts of GOLD 5.5s and GOLD 6s.

Though the trade has slightly negative carry, if rates stay flat, the carry on the trade will increase, as the speed gap narrows between GOLD 5.5s and GNMA 6s, currently at about 55 CPR. Meanwhile, GOLD 6s would be paying over 70 CPR.

Analysts said that there is a slight short duration position. However, if rates were to rally, the carry on the trade would increase even more. It should be noted that currently GNMA 6.5s are prepaying at around 60 CPR. They said that it is clear that in a 50 basis point rally, the speeds on both GOLD 5.5s and 6s would be off the charts. Thus, the upfront negative carry is actually offset by a positive convexity, though this trade is very slightly long vega. The firm also looked at the spread that this trade offers, about +7 ¼ Libor OAS. This is despite the fact that GNMAs are Treasury-good.

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