With mortgage rates inching ever so slightly closer to the 9% mark - the highest in five years - investors are wondering if the mortgages they are holding are facing extension risk.
"And given that most investors have a very large exposure to discount mortgages, because that's where most of them are, that may be a concern," said Dale Westhoff, a managing director at Bear, Stearns & Co. "I think clearly given that where the Fed is, the risk/reward favors up-in-coupon type trades, so that's where there's been some activity."
Westhoff added that the market has practically priced in a 50 basis point hike (see story, page 3). At press time Thursday evening, the market seemed to reflect that, with 30-year mortgages underperforming by 8.5 ticks. However, 8.5 coupons fared well, as investors moved up-in-coupon.
Overall, though, activity has been rather light, as investors are waiting for the Fed to make its announcement this Tuesday, but it is still a strong market. With only a few economic reports coming out Friday, it makes it all the more likely that trading will stay light until this Tuesday.
"In general it's still a positive environment for mortgages in terms of supply and prepayments, and nominal spreads are still close to 180 off and are relatively attractive versus swaps," said Westhoff. "So they're pretty attractive just from a pure pricing basis."
With the Ginnie Mae program changes currently on hold, Ginnie/Fannie spreads have widened a bit as a result of some of the concerns of what Ginnie Mae's next move will be. "The feeling is they're in a position where they need to respond to the Home Loan Banks' initiatives in FHA product with their MPF program," Westhoff said.
As the U.S. Treasury Department continues its buyback program, it has been recommended that Ginnie Mae securities will be good alternatives to those investors seeking zero credit risk.
On the whole, mortgage spreads were five to six basis points wider on 6s through 8s, and only one to two basis points out for higher coupons. Agencies and corporates were generally in line with mortgages, being out five to seven basis points.
CMBS Deal Prices
The much ballyhooed commercial mortgage-backed transaction from Lehman Brothers and UBS Warburg has finally priced. The $1.37 billion benchmark CMBS transaction consisted of eight tranches, two of which were rated triple-A - the Class-A1, 5.72-year tranche for $395 million yielded 8.043% at a spread of 128.3 basis points over Treasurys and the Class-A2, 9.56-year $698.27 million tranche yielded 8.23% at a spread of 166.6 over. The Class-B tranche was rated double-A and was 9.775 years for $75.40 million, yielded 8.369% at a spread of 181.6 over.
The deal is backed by loans either originated or acquired by UBS and Lehman. There are 190 fixed-rate loans and 198 multifamily and commercial properties in 31 states.
Overall, the CMBS market has been relatively similar to that of Fannie Mae. The changes versus Treasurys with a five-year triple-A rated CMBS are almost identical to those on a 15-year Fannie Mae, according to a PaineWebber report. Changes in the 10-year CMBS have been mirroring the 30-year Fannie Maes, with the exception being that the CMBS spreads are 15 to 20 basis points tighter.