Significant mega pool creation seen in the past few months has reduced the TBA deliverable supply, creating short squeezes in the sector.

In May, $27 billion in new FNMA 5 Megas were created. This followed four consecutive months of strong Mega creation in the coupon that altogether reached close to $35 billion. In fact, Merrill Lynch analysts reported that production in FNMA 5s could not keep pace even after the $9 billion issued so far in May, and $11 billion in April. Merrill researchers believe originators will eventually be able to make enough FNMA 5s for the coupon to underperform, adding that it is starting to make sense for originators to produce high coupon 5s while retaining excess servicing.

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