In what is being described as the lightest trading week of the year, mortgage rates are holding steady and spreads are widening to historic levels. The effects of U.S. Treasury Assistant Secretary Gary Gensler's remarks about regulation of the government-sponsored enterprises last week are still being felt in the market.
"Mortgage volatility remains low, averaging a little over four basis points a day, compared with 5.8 basis points a day implied from swaptions," said David Montano, director of mortgage research at Credit Suisse First Boston.
"On the one hand, we anticipate Fed tightening to keep mortgage rates from declining substantially," he added. "On the other hand, the decline in government debt puts some downward pressure on yields though widening spreads."
According to Michael Youngblood, managing director of real estate at Banc of America Securities, the current coupon Fannie Mae - which is at 8% - was at 191 over, edging its historic wide. That wide was 220 over and was reached in October 1986. "So when I say we are edging historic wides, we are only 29 basis points from the 1980s. Not far to go," he said.
Playing Politics
With spreads widening about 16 basis points over the week, remarks made by Gensler last week are still putting continued pressure on Fannie Mae and Freddie Mac, especially with the possibility that the government will further distance itself from the GSEs.
"We don't think that's going to happen, but it clearly it sent a chill through the markets," said Dale Westhoff, managing director for MBS at Bear Stearns.
"Those concerns have been politicized by tense exchanges between the chairmen of the Senate and House banking committees," added Youngblood.
He said that the impact of those remarks c in the market can be seen in last Wednesday's cancellation of a $1 billion, 30-year Tennessee Valley Authority bond issuance. "TVA is one of the most long-established and professional borrowers in the market, and if they had felt it prudent to withdraw their offering, it is truly a sign of inclement market conditions," Youngblood said. "One would add the obvious statement that the difficulty surrounding agency debt has made hedging mortgage securities generally an even more difficult art than it has been in the past two years."
All Eyes on Ginnie Mae
The possible lifting of the cap of the Federal Home Loan Banks purchase amounts of FHA/VA loans, coupled with the recent flee from conventionals, has left demand for Ginnie Mae bonds rather strong.
"The likelihood that the cap on FHA/VA purchases is going to be lifted to the extent that they're going to be buying more FHA/VA product, you're going to have supply constraints on Ginnie Mae sector," said Westhoff.
"The Ginnie Mae/Fannie Mae swap is not so much correlated with swap spread as it is with flight to quality' events," added Montano. "It is our view that the Ginnie Mae performance should not match October 1998, as the current situation does not correspond to a financial crisis." Montano, however, favors conventionals for May settle.
Overall, for prime, subprime and CMBS issuance, the April calendar is "surprisingly thin," said Youngblood. "And it looks if it's going to be a weak beginning in terms of issuance for the second quarter of the new year."
