Credit Suisse First Boston, ranked the No. 1 manager for RMBS for the year 2000, is bolstering its eminent status in the mortgage-backed market by introducing a series of mortgage indices that track the TBA pass-through market.
The new index will have many properties of an equity index, in that the total return of the mortgage market will be represented by percent changes in the level of the index. Furthermore, the new indices will only incorporate pricing of liquid fixed-rate agency TBA passthroughs.
"The new index will not include seasoned paper, because pricing on seasoned paper can be illiquid," said David Montano, director of MBS research at CSFB. "It will only include liquid securities, or securities within the tradable universe."
For instance, the new indices will not include any coupons above 8.5%, and will not include weights of less than 1.5% for 30-years or weights of less than 0.4% on the 15-year side. The indices will cover all agency passthroughs and will track separately 15-year, 30-year conventional and Ginnie Mae bonds. The criteria for inclusion in the index will be defined in advance and will not be changed arbitrarily, Montano said.
Because the majority of seasoned MBS are in buy-and-hold accounts, they do not trade actively in the market, and hence CSFB did not include them in the new indices. "These securities are not liquid and do not trade everyday," he noted.
The initial index level is set at 100 for Dec. 31, 1993. Changes in the index level reflect the compounded returns and not the market value of the market since the inception of the index.
Montano said that CSFB decided to launch these indices for several reasons, including the fact that the bank is a large enough presence in the market to warrant its own index and that it is expected to help generate other businesses.