With interest rates rising, spreads widening and home starts falling, investors are agreeing that the mortgage market is still healthy. But disagreement arises when it comes to what to do with these factors reacting the way they are.
Spreads have tightened more than 25 basis points since August, when they topped out at 190 over Treasurys. As of Oct. 20, the spread had been reduced to an average of 158 basis points. However, many analysts and investors foresee the spreads widening slightly more before the end of the year.
"We still have some room to go," noted Kathleen Foody-Malus, vice president and MBS portfolio manager at Federated Investors. "I still think there's value in the mortgage-backed market. Is there as much value as when we were 20 basis points wider? No, but we're still at a positive value."
However, Robert Calhoun, co-director of research at fixed-income specialists Tattersall Advisory Group, does not see this as an opportune buying period. "I think it's a good time to hold," he said. "There were definitely better entry points this summer and late summer. Spreads are definitely significantly tighter than they were in early August, but nevertheless spreads, in general, in all sectors of products are still very cheap on the long term basis".
The month of September saw a 3.2% decrease in housing starts, giving the bond market a slight boost early on in the week, while mortgage interest rates hovered around 7.6% at the end of the week.
"With interest rates being higher, and housing sales starting to slow, that means there's less supply coming into the marketplace," said Foody-Malus. "And when there's less supply coming into the marketplace, that's a positive, in the sense that I'm now starting to see a pickup in demand."
Calhoun said that the numbers do not amount to much, though. "Theoretically, a drop in housing starts helps the mortgage market because it should provide less supply to the market, but it's really such a marginal effect that its overwhelmed by so many other things in the marketplace that you can almost discount it completely."
Ginnie Maes
Throughout last week, Ginnie Mae to-be-announced adjustable-rate mortgages took a beating, said Art Frank, director of mortgage research at Nomura Securities. Total issuance for October was $1.9 billion, which was $400 million to $500 million more than expected. The heaviest issuance were in 6% and 6.5% coupons.
As a result, mortgage bankers began selling the Ginnie Mae ARMs at numbers that frightened buyers. Sources said people were bidding cautiously for TBA Ginnie Mae ARMs, and they finished down 7/32 - underperformers compared with Treasury hedge ratios.
"We saw supply coming, and we've been touting very seasoned Ginnie ARMs rather than TBA as the better investment," said Frank. "Partly because of supply pressures in TBA and partly because the negative convexity is much less in the very seasoned Ginnie ARMs than it is in new stuff." He recommended the Ginnie Mae vintage 1992, 1993 and 1994.
Otherwise, Fannie Mae had a decent week after a bad Friday. Following spreads widening to 155 over the 10-year Treasury, Fannie Mae MBS finished at 150 over the following Thursday. Frank said that the 15-year sector is outperforming the 30-year, with ARMs going the other way.
"So for the week, there's been some decent buying of mortgages," he added.
