As Ginnie Mae mortgage-backed securities reached an all time high in reaction to a GSE reform bill currently working its way through the House Banking Committee, investors have begun to believe the bill will not make it out of committee this year, and began to rapidly sell Ginnie Maes.

"In fact, for June delivery, Ginnie 7.5s were up nine ticks, and Fannie 7.5s were up 17.5 ticks, so Ginnies 7.5s had a quarter point underperformance, and Ginnie 8s had 6.5 ticks underperformance," said Art Frank, head of mortgage research at Nomura Securities, calling the event a "pretty dramatic cheapening of Ginnies."

The breaking point at which investors felt that Ginnie Maes had gotten too rich was when they were trading at one basis point higher than Fannie Maes.

The so-called "battering" of Ginnie Maes came despite a market rally and positive economic releases. "This morning we have observed the Ginnie Mae/Fannie Mae 7.5 swap go from 1-03 to 0-26 despite a market rally," said David Montano, mortgage researcher at Credit Suisse First Boston. "Generally, Ginnie Maes are supposed to have longer durations. Of course, Ginnie Maes have not been trading very rationally' recently. The selling in GNMA this morning has been heavy."

Frank also noted that agency debentures also came in about 2.5 basis points. Spreads at press time Thursday afternoon between the Fannie Mae 8% and the 9.2-year Treasury were only one basis point wider, at 188 over.

Analysts are recommending up-in-coupon trades. "We continue to recommend up-in-coupon, favoring Fannie Mae 8.5s and 8s," said Montano. "We are concerned about the performance of Fannie Mae 7.5s where supply has been the heaviest. We also note that new issue residential subordinates spreads have been widening over the last couple of weeks - single-Bs wider by about 30 basis points - an indication that more investors believe that we have hit the peak in the housing market."

Elsewhere, the beginning of the week saw a heavy volume of mortgage originators selling, though it eased up later on in the week. "It's still pretty much the prime season for purchase applications, but that should tail off in a couple weeks," Frank said. "May and early June are popular times for people to buy homes to close in July and August. So we're coming toward the end of the period of relatively heavy mortgage banker supply, but we haven't seen #he end of it."

Convexity for Yield

In a report issued by Salomon Smith Barney in this week's Bond Market Roundup, the company is suggesting to investors to trade convexity for yield because of a further inversion of the yield curve and a low-volatility environment. A barbell strategy will then take form as the optimal portfolio structure.

An example of this is to buy 8.5s and 6s and sell 7s, providing an additional three to five basis point return over a six-month investment horizon.

CMBS Deal in the Pipeline

PNC Bank Corp., Morgan Stanley Dean Witter & Co. and CIBC World Markets Corp. have started marketing a $802 million commercial mortgage-backed deal. The triple-crown transaction has been rumored to price June 5.

"Logic has with three different originators, it tends to create some resemblance of a CMBS soup, rather than having a distinct consistency for the origination process," said Michael Hoeh, an MBS portfolio manager at Dreyfus Corp.

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