Some research from Wall Street has already started to come out on Treasury's plan The Troubled Asset Relief Act of 2008, which has been proposed to buy up troubled/illiquid assets at financial firms. 

Credit Suisse analysts said that before this proposed action, the government had focused on the liquidity issues and mortgages rates. 

This latest measure addresses "the other missing piece of the puzzle, the need for vast amounts of balance sheet to instill confidence and stability in the market and to bring the eventual housing bottom closer."

Meanwhile, JPMorgan Securities analysts expect the government would likely start with buying the delinquent mortgage loans as this would free up more capital for banks versus securities as loans carry a higher RBC weighting.

Credit Suisse also expects the sectors marked down the most will be the first in line to be delivered to the government. This would be subprime and option ARMs, they said. The improved balance sheet position should contribute to improvement in dollar rolls as well.

JPMorgan analysts expect this would ease some of the pressures particularly in the non-agency sector.

They believe that at the very least, the sector should actually experience some tightening that is not attributed to worse financing, downgrade risk and expected principal loss. "This "residual" widening that has occurred (about 10 points) is not warranted given the government support currently," JPMorgan analysts said. 

Credit Suisse adds that prepayments on non-agency MBS should increase on the combination of an expanded GSE credit box and/or increased application for the Hope for Homeowners program on mortgages acquired by the new Treasury fund. "This should be broadly positive for non-agency MBS," Credit Suisse analysts said.

Volatility is expected to turn lower as the government is not likely to hedge. In this is case, JPMorgan says it is not clear who the bid for long-dated vol will come from. This is a benefit for nominal mortgage spreads. Another impact of the Treasury not hedging is that it results in an outright duration long, points out Credit Suisse, and a curve flattener. 

"This should mitigate extension risk in a rate sell-off," they said.  They also suggest the expanded credit criteria should also limit servicers" need to shed duration in a sell-off.

With the prospect of the GSEs and Treasury buying MBS to keep mortgage rates low, at the same time that Treasury rates are rising on increasing debt, Credit Suisse believes the basis should trade at the tight end of a 70 to 100 basis points range.

For more on this issue, please look out for next week's edition of Asset Securitization Report.

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