As the year draws to a close for the mortgage-backed securities market, quiet trading floors and thin activity were slowly replaced with a low buzz about - could it be? - a distinct comeback for mortgages in 2000.
"Activity will pick up fairly rapidly," said Dale Westhoff, a managing director in the mortgage department at Bear, Stearns & Co. "I think six months ago, there were very few market participants who thought activity would be as good as it has been in December, and that spreads would be as tight. I think it will be fairly brisk right out of the box next year. Mortgage product in particular is in a very good technical position right now, because we're projecting total fixed-rate MBS supply to drop below $25 billion per month."
"Liquidity will be very good in the passthrough market," added Art Frank, head of MBS research at Nomura Securities. "There may be a little of a supply demand imbalance, but liquidity remains excellent. While it won't grow much in the next three months, over the next year, it certainly will."
This past week, market participants said that mortgages were pretty fair-valued, in the middle of their three-month range. The current coupon Fannie Mae tightened in one basis point to 138 over Treasurys, reflecting a very quiet, inactive week for the marketplace.
"There's not a lot of production out there," Westhoff said. "I think a full gamut of investors will be coming back to spread product after year-end. We normally get the slowdown at year-end anyway, but with Y2K, I think it's kind of amplified the effect. And there's this kind of supply-demand bias that I think will keep spreads tight, and probably will cause them to tighten further."
Sources added that the trades that are taking place are people just squaring up and getting ready for the first quarter.
"We're only expecting to see $10 billion to $12 billion a month in net new fixed-rate agency supply - issuance minus paydowns - which is not much more than Fannie Mae or Freddie Mac have been buying each month for their portfolio," Nomura's Frank said. "Growth will be zero for the next four months. We're not looking for a very dramatic tightening, but perhaps 7 to 10 basis points."
CMBS Activity for Year-End
As MBSL mentioned last week, GMAC's credit tenant lease commercial mortgage-backed securities deal launched and priced this week. The triple-A piece, for $345 million, sold at a spread of 117 basis points over Treasurys, and had a 4.6 year maturity. The underwriters were Goldman, Sachs & Co. and Deutsche Bank Alex. Brown (see story, MBSL 12/6/99).
First Union Capital Markets and Merrill Lynch & Co. also put the reds out for their $885 million conduit, which will launch next week.
Caisse de Depots et Consignations, France's largest financial institution, is also expected to sell $549 million in securities backed by floating-rate loans next week, sources said.
November Prepayments Out for FNMA and GNMA
Finally, Fannie Mae and Ginnie Mae prepayment reports for November were issued last week, and speeds were both slower across all coupons. Fannie Mae discount speeds declined by roughly 5%, while current coupons were down 5% to 10%.
According to Jonathan Raiff, prepayment analyst at PaineWebber Inc., the Ginnie Mae report was surprising because faster speeds were reported for nearly all coupons last month. This month's report reverses that, with slower GNMA speeds for all coupons.