The summer doldrums were well in gear last week, sources say, as there were minimal moves in mortgage spreads in either direction.
"There is no real movement in spreads one way or the other right now," said one MBS trader. "Mortgages tightened early in the week, but gave a lot of it back later in the week."
The current coupon Fannie Mae widened five basis points to 146 over the curve, market sources noted. Although there are currently many variables at play in the market - the Fed on the move, Y2K issues and liquidity concerns, just to name a few - investors seem to feel that there is still lots of value out there.
"Net issuance outstanding is actually up," said the trader. "Pass-throughs remain strong, there is strong subprime issuance and we are very strong in terms of CMBS. But since the net outstanding continues to grow, even in the agency market, the market has problems absorbing that volume."
One source noted that Lehman Brothers recently kicked out smaller issues from its index, raising the cutoff from a minimum of $100 million to $150 million. This move affected agencies the most, because government-sponsored enterprises tend to produce many smaller issues.
"The amount of agency participation in the index fell by 1.5%," said an MBS market source.
Although interest rates declined slightly last week, current mortgage rates have choked off much of the refinancing activity in the housing market, according to Frank Nothaft, deputy chief economist for Freddie Mac.
"We have seen refinancing slip from 63% in October 1998 to only about a quarter of the market today," he said.
Also last week, Freddie Mac sold $3 billion of five-year notes at a yield 54.5 basis points more than Treasurys with comparable maturities.
CMBS: Good Value in IOs
Commercial mortgage-backed spread product widened out significantly last week, following a trend that has continued throughout the second quarter.
According to market insiders, spreads for CMBS widened out since the beginning of the quarter, especially in the investment-grade sector, where it widened approximately five basis points to ten basis points over the course of the quarter.
However, the triple-B and triple-B-minus pieces tightened in since the beginning of the quarter, sources mentioned. Subordinate pieces and interest only strips also tightened in dramatically, with the latter tightening approximately 75 basis points since April.
"There is good call protection in IOs, and people are beginning to realize that," a CMBS trader said. "It was 425 over the curve at the beginning of the quarter at 100 CPR, and now closer to 375, so people are now starting to see the value in this stuff."
However, the source also mentioned that IOs are becoming more differentiated as the market goes through "structural issues."
"Because of the coupons of the loans, the kind of IO that you can carve out is much more credit-levered," said the market player. "There was a time when most IOs traded within a close range of each other. I don't know if that is going to be the case now."
On the deal front, look for a $733 million basic conduit CMBS transaction to be launched next week by Morgan Stanley Dean Witter, CIBC Oppenheimer, Midland Bank and Residential Funding Corp. The collateral will be 33% multifamily, 26.8% retail, 21% office, and 12.1% industrial. The standard conduit will contain tranches from triple-A down to triple-B-minus, and an IO. Some investment grade pieces are already spoken for, sources said.
In other news, the National Realty Funding/Greenwich Funding CMBS deal led by Prudential was reportedly having trouble, as the B-piece buyers were "pulling out perhaps several hundred million in loans." According to a source, Greenwich bought the loans from ContiFinancial. - AT