A $1 billion sale in conventionals late Thursday afternoon capped off a rather quiet week within the mortgage market, as market observers recommend a down-in-coupon trading.
"There was a big seller, a money manager," said a mortgage-backed trader. "He sold some mortgages and some asset-backeds. That's what dominated the market. Otherwise, it was pretty quiet." The sale, which was reported to have been an asset swap, was said to be in the 7% coupon.
Rumored about the sale is that the conventionals were sold or swapped for Ginnie Mae securities. "I don't know for sure, but I'd be surprised if they're dumping conventionals for Ginnie Mae product" said Gary Singleterry, president of Singleterry & Co.
"What I have heard is that there has been a lot of debt selling of mortgages against Treasurys," Singleterry said. "I have heard from a number of dealers selling of mortgages started yesterday afternoon and continued today.
"I'm only guessing they're doing what they're doing because they didn't think the yield spread versus Treasurys was sufficient," he added, noting that mortgage spreads have widened and may still go out further.
"Fannie 8s have way outperformed Fannie 8.5s," said Art Frank, head of mortgage research at Nomura Securities. "A week ago, we thought Fannie 8.5s were cheap, and were one of the real bargains in the market, now we see them as a good three ticks rich, and people who went up in coupon we think should go back down out of 8.5s back down to 8s."
He added that the swap was at 128 last Thursday, out 11 ticks from the 117 posted the previous Friday.
"With the rates backing-up and 8s and 8.5s cheapening up, we would use the opportunity to add to those coupons, in particular to take advantage of the better rolls," said David Montano, director of mortgage-backed securities research at Credit Suisse First Boston. "The sectors have cheapened as they have become the supply coupons."
Those Lagging Ginnie Maes
Despite all the hoopla Ginnie Mae has created recently with the announcement that it is considering changes in its Program I an II MBS, Ginnie Is were well bid. However Ginnie IIs lagged behind.
"Ginnie II 7s are a full half point behind Ginnie Is," said Frank. "We think they should trade 10-11 ticks behind. So we see them five to six ticks behind fair value."
After a conference call last Monday regarding the proposed changes, Ginnie Maes were aggressively bid.
Montano noted that supply in Ginnie Mae I is decreasing partly due to competition from the Federal Home Loan Banks' mortgage partnership finance program, with Ginnie Mae IIs becoming a larger component of Ginnie Mae securitization, representing about 40% of production in April. However, they have been trading about 16/32 back of Ginnie Mae Is, "with poor liquidity."
"In a $95 priced security, the extra 25 or so basis points of weighted average coupon are a benefit, not a harm," added Frank. "Prepaying when it gets to103 or 104 is a far fetched concern right now."
"The change in the Ginnie Mae I program on a fundamental basis is minor," agreed Montano. "An extra 25 basis points of WAC with most securities discounts, should not lead to a major difference in. Currently, for conventionals there are no significant pay-ups for low WAC securities."
Down the CMBS Pipeline
Starwood Financial Corp. offered a $1.18 billion floating-rate collateralization last week. Comprised of $485 million triple-A rated class-A debt, $95 million of Aa2 reated class-B debt and $106 million A2-reated class-C credits, the deal is being managed by Greenwich Capital Markets and Merrill Lynch & Co.
A $300 million single-asset transaction is set to price this week as well. Managed by Credit Suisse First Boston, the building is the 44-story class-A 1211 Avenue of the Americas in Manhattan. Triple-A rated fixed-rate paper totaling $141 million is the largest tranche of the deal, which also consists of $46 million of double-A debt, $41 million of single-A rated debt, and $44 million in triple-B rated debt.