In a report released last week, analysts from FTN Financial recommended triple-A whole loan PACs. They said that for those buyers who would like to have additional carry, analysts are extending their recommendation to include triple-A whole loan PACs. Although a considerable downgrade to subprime paper could affect the triple-A rated non-agency market, analysts think the potential spread widening would be limited and would not last very long. They said that WL PACs are the only class to show considerable widening in the second half of last year. The sector has widened 10 to 23 basis points across the curve since May 12, analysts noted. The rally in the 10-year has also created more band risk, which has resulted in buysiders believing that WL PACs will trade closer to sequentials. Although FTN analysts have not ruled this out entirely, they think that the market has been oversold lately. At these wide levels, analysts believe that there could be TRR benefits to owning tight-window paper, even if the PAC band breaks, analysts stated in the report.
They presented a snapshot of the current market place for fixed rate mortgages, which tells the story. According to the LOAS duration space, analysts said that almost the whole CMO universe provides buysiders more value compared to TBA product risk adjusted.
Although analysts actually like this sector, they emphasized in the report that it is important for MBS buyers to do their homework. The underlying collateral will be a key in the individual security's performance, they said, specifically in non-agencies. There are various collateral characteristics for investors to review. These are the fact that seasoning brings prepayment stability while both loan balance and geographics offer call or extension protection. Large WAC dispersion could result in unsuspected "whippy" speeds. Aside from this, investors should look for super senior tranches in the non-agency space whenever possible, FTN analysts suggested.
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