A rather lackluster week for mortgage-backed securities ended with Treasurys rebounding following the release of the minutes from the Federal Open Markets Committee meeting, as well as a slumping equities market and market players squaring positions for an upcoming employment report.
Based on the lack of activity in mortgages, as well as slightly better selling from both originators and investors, mortgages were held back.
Near close last Thursday, 30s were underperformed by 2.7 ticks with 15s off 2.8 ticks. Spreads in both sectors were two to three basis points wider on the day, out about an additional basis point from earlier in the day.
Swaps and corporates were also out two to three basis points at the end of the day, while agencies were three to four basis points wider on a wave of selling this afternoon.
Bid list activity continued last week. While the week had been fairly quiet following the prior week's robust CMO bid lists, signs were showing that bid list activity was beginning to emerge again.
At press time there was a small agency CMO bid list totaling $126 billion. In addition, this week there is a $1 billion pass-through list slated, coming with $750 million in 30s and $250 million in 15s, from a bank.
Morgan Stanley Dean Witter put out a report last week discussing the reduction in MBS holdings by banks. It noted that for the first time in nearly a decade, bank loans exceed deposits, necessitating the need to sell securities.
In addition, with consumer borrowing remaining high, it is more lucrative for a bank to make loans.
The analysts expect banks to sell about $30 billion in the second half of the year, split evenly between CMOs and pass-throughs. According to their calculation, so far only about $8 billion had been sold through mid-September. The bulk of securities sold are predicted to be conventionals as only a small portion of bank holdings - 16% - is invested in Ginnie Mae bonds.
According to analysts at Credit Suisse First Boston, Freddie Mac prepayments were a mixed bag.
Turnover speeds slowed down by about 5% on discounts 30-year 6s and 6.5s. New origination 30-year 7.5 to 8s accelerated by 1% to 2% constant prepayment rate, as normal prepayment acceleration due to seasoning was aided by lower mortgage rates.
The analysts expected Fannie Mae speeds to be 10% slower. As mortgage rates have hit their lows for the year, the analysts expect a continued prepayment pick-up in newer premiums.
"Our point estimates, at current rates, on newer Fannie Mae premiums are 25% CPR on 8.5s of 2000, and about 32% CPR on 9s of 2000," the CSFB report said. "In contrast, seasoned premiums are unlikely to show huge prepayment reactivity at current rates. As we approach the winter months, we expect a further 30% to 40% slowdown in discount speeds by February."
At press time, price talk details were starting to emerge on next week's $1 billion PNCMA deal. The five-year triple-A tranche is talked at +29 to +30 basis points and the 10-year at +39 to +40 basis points. This is in line with where J.P. Morgan came the week prior.
Additionally, in a report Greenwich Capital Markets issued last week, researcher Linda Lowell highly recommends triple-B CMBS. Not only are they cheap historically to swaps and Treasurys, but they are cheap to high-grade CMBS.
"This credit spread should re-compress if the yield curve steepens," the report says. "They are cheap to triple-B-minus CMBS. The pending ERISA exemptions for investment-grade subordinate backed by fully secured consumer obligations should expand demand."
In particular, GCM prefers triple-B CMBS to corporates because of better technicals, superior credit performance and upgrade potential.
"For the same reasons we prefer them to comparable corporates, particularly in a slowing economic environment."