In the next two months, the amount of outstanding fixed rate mortgages should decline sharply, according to analysts from JPMorgan.
Having the MBA Refinancing Index above 8000 for most of March will result in a 15% increase in paydowns in April/May, with the supply from resecuritization likely delayed by several more months.
However, net 30-year supply will remain negative. This is attributed to new production in 15s and ARMs. Analysts estimate that about 15% of 30s are refinancing into ARMs while 15% are refinancing into 15-years. Thirty-year net issuance is dipping because of paydowns. This is while 15-year issuance is evidently increasing with rising 30-year paydowns.
Analysts said that the market should expect net 30-year issuance to dip at $20 billion per month in April/May. Fixed-rate agency issuance so far in April has reached approximately $126 billion and is on pace for a little over $140 billion for the month. Paydowns in March were $135 billion; with paydowns expected to go up by 15% (to $153 billion) in April. This is why the amount of outstanding fixed-rate agency MBS may dip in April by around $10 billion, with 30s losing around $20 billion. This implies that the amount of outstanding 30s will have dropped by more than $130 billion in the last eight months or about 7% of the total outstanding in August 2002.
The large majority of the dip in outstanding 30s is at the expense of Golds. After a brief rise in issuance in March, Gold 30-year supply is once again down significantly, with only a 15% market share (even lower than the GNMA share). However, the FNMA market share has risen to 68% of all agency 30-year issuance.
The declining Gold market share is likely due to the relatively poor current coupon execution and, at the margin, growth from the MPF program. Analysts also mentioned that the poor execution has been partly tied to the inferior convexity of TBA Golds. For instance, the Gold/FNMA 6.5 swap is negative 1/32s and the 7s swap is negative 7/32s. The Gold 7s are trading (delay adjusted) almost half a point "cheap" to FNMAs, said the researchers.