Supply is becoming an increasing concern in the MBS market and was the major topic discussed in all the research last week. Most analysts recommend a neutral to slightly underweight recommendation primarily on increased supply and lack of GSE sponsorship. Supply started to pick up on the Treasury downtrade early in the week with about $5 billion issued through mid-week; however, the supply was easily absorbed by VERY strong demand from hedge funds, particularly in 6s and 6.5s. In comments from UBS Warburg, the researchers noted that mortgage hedge funds have experienced a large inflow of funds that has accelerated in the past few weeks as equities have collapsed. They expect with continuing weakness in equities, hedge fund inflows will continue.
Good buying interest was seen finally from the GSEs. One big concern regarding an increase in supply has been the lack of GSE sponsorship. This may be returning as the GSEs are seeing renewed portfolio growth. For the second quarter, Fannie Mae reported net portfolio growth of nearly 5% to $741 billion. In fact, JPMorgan Securities on Wednesday upgraded their neutral recommendation to overweight versus swaps and agencies partly on the renewed GSE portfolio growth.