In discussing the demand from Asian central banks for MBS, UBS analysts reported that foreign demand is likely to keep spreads tight, and that fixed-rate agency passthroughs, given their quality, should benefit disproportionately as the preferred investment.
UBS' annual Central Bank Survey suggests there will be a sharp increase in demand versus previous years. Currently, the Asian portion of the world's reserves totals about 71%, up from 48% in June 1998. This is growing rapidly at about $40 billion per month, reported UBS China Economist Jonathan Anderson. Survey results show the increased pressure on central banks to generate higher income, and many respondents are concerned with low U.S. Treasury yields. The survey showed 71% of the respondents indicated they added more spread product in the last year, and 62% indicated they would be adding even more in the coming year. MBS and ABS were rated second (19% of respondents) and third (16% of respondents), respectively, as the asset classes to receive higher allocations. Sovereign eurobonds topped the list with 21% of respondents. UBS said that while only 19% of respondents mentioned increasing MBS exposure, they actually totaled 45% on a reserve-weighted basis.