The "disinversion" and steepening of the yield curve has the MBS market cheering, as the 15-year sector garnered more attention than 30-year bonds.
"This normalization of the yield curve helps tremendously, because as the collateralized mortgage obligation (CMO) bid comes back, the roll market develops, and it definitely helps," said Kathleen Foody-Malus, an MBS investor at Federated Investors.
"Mortgages are doing very well and people are beginning to believe that the flattening era is over, so investors are reversing that trade," added David Montano, the director of MBS research at Credit Suisse First Boston. "This is a superb thing for the mortgage market - the best possible thing that could happen to the market."
There is no doubt that further steepening of the curve will rally spread product, sources say, but leverage play will remain difficult, mainly because one-month Libor is above 6.5%, which is above the entire Treasury market.
"These are pretty wide numbers for a leveraged account," a source noted. "The short-end of the curve needs to rally before spreads will tighten in significantly."
That being said, CMOs printed last week, which is certainly a positive step for the illiquid MBS market.
"Mortgages simply look more valuable now," noted a trader. "When the curve was inverted, it was rather new territory. It was hard to get a feel for where value was, and where people cared. Now we're going back to an environment where people are more comfortable in this type of product."
Even though the Ginnie Mae bid has faded, mortgages did quite well last week despite huge corporate issuance.
Near close last Thursday, 15s were outperforming by 2.2 ticks while 30s were leading by 1.5 ticks. Helping 15s performance was unchanged prices in the five-year part of the curve.
The FNMA DUS Deal
Investors were impressed with how well the novel $510 million Fannie Mae multifamily DUS deal, agented by DLJ, fared in the marketplace last week.
Pricing 14 basis points over the Agency benchmark, one would think that a new product such as this would price cheaper, considering that normal DUS prices 10 basis points wide to swap spreads.
"This is a successful pricing of a totally new transaction," an investor said. "This offers a better structure than DUS pools currently do, but not that much better. But I don't think the deal is more liquid than the DUS market."
The deal is backed by 41 loans originated through FNMA's securitization program, which gives borrowers the option of taking off about five basis points from their rate. Additionallyk, the loans give the borrower a bit of a better call protection, mainly because the loans carry defeasance provisions that eliminate the risk of prepayment of the bondholder.
