Prepayment speeds on lower coupon, unseasoned conventional issues accelerated faster than expected. At the same time, older vintages and premium speeds held flat or slowed inline with expectations.
In the Fannie Mae sector, 2002 6s jumped nearly 20% to 26% CPR, while 2001 issues were up 10% to 44% CPR. In 6.5s, 2002 vintages gained 7% to 45% CPR; 2001 issues held flat. Lastly, in the 7% sector, 2002s rose 3% to 45% CPR, while older vintages slowed 1% to 2% CPR.
Analysts at Bear Stearns said the stage is set for increased speeds in February given under-6% mortgage rates since December. Holding speeds down, however, was a low day count (19 days) and the gloomy weather. At this time, 88% of the mortgage universe is exposed to refinancing risk, analysts said. With the high exposure as well as an increased day count in March (21 days), they estimate 6s to prepay at 50% to 65% CPR.
Ginnie Mae speeds increased for 6s and 6.5s, and were flat or slowed for 7s and higher. Salomon Smith Barney researchers suggest that the higher coupon Ginnies lagged conventionals as lenders focused on the easier-to-refinance conventional loans. The Ginnie report recorded 2002 6s up 30% to 23% CPR in February, while 2001 gained 10% to 26% CPR.
In 2002 6.5s, speeds increased from about 41% CPR in January to 44% CPR in February, an 8% increase. Meanwhile, in 2001 vintages, speeds prepaid at less than 50% CPR in January and increased to 51% in February, a 3% gain. In the 7% sector, 2002 speeds were flat at 49% CPR, 2001s fell 3% to 58% CPR, and 2000s declined 9% to 54% CPR.
Looking ahead to March, Salomon analysts expect speeds to increase, but probably less than conventionals as lenders focus on processing the higher loan balance conventional loans.
to favor sector
Despite low rates and the prospect that the mortgage market will likely hit new record high prepayment levels, analysts remain favorable on the sector for the same reasons mortgages were favored last year.
* Technicals remain strong: 30-year net issuance in February was again negative, making it seven months in a row now. JPMorgan Securities researchers stated that fixed-rate agency issuance is running at around $2 billion per month for the last eight months due to increasing 15-year issuance. This is a 90% plunge in net production from 2001 and during the first half of 2002. Net Gold issuance in particular has seen a rather spectacular drop. JPMorgan reports that February saw its largest one-month drop as paydowns exceeded Gold production by $16 billion. Further, Gold 30-year supply has declined by $65 billion over the last seven months.
* Demand remains very healthy: Banks continue to provide strong support as loan demand remains weak on the slow economy. Traditional investors of the credit market are also staying with the mortgage market as the uncertain economy and looming war with Iraq make many reluctant to move into that sector just yet.
* Carry remains favorable: 5s and 5.5s are likely to see strengthening rolls in the coming months.
Mortgages top performing sector in February
For the month of February, mortgages were the top-performing sector, according to analysts at Lehman Brothers. The MBS Index recorded an excess return of 34 basis points versus 21 basis points for the Aggregate Index, 18 basis points for the Agency Index, 27 basis points for ABS, and 24 basis points for the Corporate Index. Meanwhile, year-to-date, mortgages showed gains of 55 basis points versus a 59 basis points increase for ABS, 104 for corporates, 25 for Agencies, and 49 for the Index as a whole.
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