The Federal Reserve has had a tremendous influence on the agency mortgage market over the past year. For example, it owns a significant portion in lower coupons and in conventionals — especially FNMAs, and just a small amount of GNMAs (9.1% of their portfolio).

In terms of spreads, Libor OASs are near their historical tights, FTN Financial analysts said. However, they have recently bounced off their lows. They added that this analysis showed that GNSF is cheap to FNCL and FNCI is cheap to GNSF. 

A review of static spreads also highlighted the tight levels as well as showed 15-year MBS cheap to 30-years and that the 15-year sector is cheap to itself on a historical basis. 

FTN analysts added that if the yield curve remains steep, the 15-year basis versus the 2/5 blend will likely remain wider than the 30-year basis versus the 5/10 blend.

However, they do believe the relative spread between the two will tighten with the end of the Fed's purchase program. 

"After all, the Fed has concentrated heavily in the 30-year market, and the 15-year market will not have the negative implication of losing its largest market participant as the 30-year market will," they observed.

Finally they look at daily hedge performance. Again as participants are aware, higher coupons have been the winner and in 2010 the 5.5 coupon has been the star.  They also pointed out in this analysis that 15-year 5.5s have performed in line with 30-year 5.5s so far in 2010 (ex roll) versus UST and swaps, while GNSF 6.0 has been in line with FNCL 6s. 

From all this, they recommend an overweight to GNSF (not G2SF) 5.5s and 6.0s and to FNCI 5.0s and 5.5s with a preference to newer production, specified pool form. This is a way to help reduce the risks associated with the Fed's exit.

This is a bit prescient considering today's Freddie Mac announcement that  it will purchase substantially all 120 days or more delinquent mortgage loans from the company's related fixed-rate and ARM Participation Certificate  securities.  FTN analysts also cited the uncertainty surrounding conventional buyouts in higher coupons to support their recommendation.

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