Hybrid issuance has declined as a result of the flatter yield curve and banks retaining the originations in their portfolio, analysts said.
In recent research, for example, Credit Suisse analysts noted the decline in Countrywide's share in both agency and non-agency paper, which has contributed to the overall decline in hybrid issuance. They point out that in the second quarter of 2004, Countrywide's share of agency hybrid issuance was 46% compared to 21% in the first quarter of this year. Furthermore, the drop in Countrywide's market share of non-agency is less obvious while the declining market share of issuance is seen throughout hybrid reset types.
While this was happening, Countrywide's Treasury Bank has seen a surge in its assets over this time period. For instance, asset holdings of Countrywide's Treasury Bank have leapt to $39 billion in February from $27 billion in June 2004. This suggests, according to Credit Suisse researchers, that Countrywide is adding hybrids to its bank portfolio.
"We postulate that Countrywide may be adding hybrids, especially loans eligible for securitization as agency hybrids, to its bank portfolio, contributing to a corresponding surge in assets at the bank," wrote analysts.
In addition to the improving supply technicals, spread tightening in hybrids has lagged that of fixed rate MBS, analysts noted, mostly seen in the agency sector. Credit Suisse calculates a 29 basis point pick-up in OAS on agency 5/1 hybrids versus 15-year MBS. This is near historical wides, they add.
JPMorgan's take on ARMs
Meanwhile, in research from JPMorgan Securities, analysts stated that hybrid ARMs are the most attractive on a fundamental basis. They note that while a majority of the sector is at a discount, prepayments remain robust as the flat curve has led to refinancings into 30-year fixed rate or IO loans.
In particular, analysts favor new issue 7/1s over seasoned 5/1s, and new issue or modestly seasoned 10/1 versus dwarfs. Seasoned paper is currently trading at the tighter end of their range, which is why JPMorgan analysts prefer the less seasoned paper.
"Moreover, with Fed rates rising, the slower pace of paydowns (as prepayments ramp) on new issue paper allow for a greater proportion of principal reinvestment at higher reinvestment rates," analysts stated.
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