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.
Over the Wednesday-to-Wednesday period, spreads are a couple of basis points tighter on the strong pick up in demand. Following the interest from hedge funds and GSEs, money managers, banks, and CMO desks took note and started adding to positions later in the week, including active buying in 5.5% coupons.
So what of supply? Pipelines are reported to be very full and the spigot apparently will open when a good downtrade comes
Mortgage Indexes
The Mortgage Bankers Association reported mixed results in its weekly mortgage application survey for the week ending July 12. The seasonally adjusted Refi Index rose 4% to 2730 while the Purchase Index fell 8% to 377. On an unadjusted basis, however, the Refi Index surged 50% and Purchases gained 32%. The MBA also noted that the percentage of refinancing applications to total applications rose to 53.4% from 50.4% in the previous release. Also, the share of ARMs held steady at 18%.
Freddie Mac announced mortgage rates continued to drop. For the week ending July 19, 30-year fixed rate mortgages dipped to 6.49% from 6.54% the previous week. Rates are just four basis points above their Nov. 8 low of 6.45%. Meanwhile, 15-year mortgage rates fell seven basis points to 5.93%, and one-year ARM rates plunged 16 basis points to 4.50%.
Looking ahead to this week, the Refi Index is anticipated to move higher as mortgage rates dipped further. In comments last week, Countrywide Securities noted a strong pick up in application activity, and UBS Warburg says it expects the Refi Index to rise above 3000 over the next week or so.
Prepayment outlook
Prepayments are expected to start showing significant gains starting in the July report. At this time, 2001 Fannie Mae 6s are predicted to prepay at 12% CPR, a 33% gain from June; 6.5s are expected to rise to 22% from 15% CPR; and 7s are seeing a 37% increase to 37% CPR. Meanwhile, 2000 7.5s are forecast to increase a modest 4% CPR to 49%. Looking ahead to September speeds, 2001 6s are expected to prepay at 16% CPR; 6.5s at 35% CPR; 7s at 48% CPR; and 2000 7.5s at 55% CPR.
