New York - While there are admittedly "no home runs in this market," according to UBS managing director and head of the fixed-income rates and currency Laurie Goodman, "You can get a lot of singles." Speaking before investors at the recent Fall Securitized Products Seminar held at the Waldorf Astoria hotel in Manhattan. Despite the tightness the MBS market has experienced, Goodman sees pockets of relative value thanks to strong technicals in the current market.
Despite the rising interest rate environment, UBS has maintained its modest overweight recommendation, citing the low percentage or refinanceable paper outstanding. "The case for MBS is stronger in a low refi environment," said Goodman.
Of the outstanding Fannie Mae MBS for example, roughly 27% of the current market is fully refinanceable, down from 70% in May and 99% in June 2003. In order to see any potential future refi wave, the average zero-point mortgage would have to decline 35 to 40 basis points to below the 5.49% threshold.
Thanks in part to the lack of refinance activity, MBS Supply is expected to remain low for the foreseeable future. Since mortgage originations peaked at $200 billion in August 2003, monthly volumes have steadily declined to the current level of less than $60 billion per month. Originations are expected to maintain the current clip, Goodman added.
On the demand side of the equation, banks are expected to continue being buyers of mortgage product, rather than sell as interest rates rise. The fact that banks have shifted cash management strategies in recent years away from commercial and industrial loans, has lead to banks holding more mortgage product than ever before.
To illustrate this point, Goodman showed how the C&I loan market has changed over the past 10 years. Currently U.S. banks make up only 12% of the C&I lending base, down from 30% in 1994. CLO's, hedge funds and high-yield funds, meanwhile have grown to 67% of the lending base, compared to 17% in 1994.
Sector recommendations from Goodman, she favors sticking with 15-year securities and moving up in coupon. In outlining her favorite up in coupon trades, Goodman noted the gains available to total return investors who move in Fannie Mae 5, 5.50 and 6s from lower-coupon bonds.
Additionally, Goodman is bullish on Ginnie Mae IIs, which she identified as being "very cheap at this juncture," adding, "Ginnie IIs rule." Within the Ginnie II universe, Goodman favors 6% coupons, but also recommends 5.5s, valuing the segment at 10 to 14 ticks cheap.
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