UBS announced this morning that it has changed its mortgage allocation from a modest overweight back to neutral.
Researchers at the firm advised a modest overweight on Oct. 7. Analysts stated that since then, mortgages have done quite well. The sector richened about 5 basis points in nominal terms vs. the average of the 5- and 10-year swap yields, and roughly 5 basis points on our rich/cheap regression models.
The firm’s perfect current coupon model now indicates that mortgages are approximately 9.3 basis points or 1.9 standard errors rich, which is confirmed by OAS analysis. They added that the current coupon FNMA, at 11 OAS, is quite close to the two-year tight of eight basis points.
“Even though mortgage technicals remain excellent, we believe it is prudent to scale back our allocation,” wrote UBS analysts. ”We would increase to a modest overweght when mortgages are about 5 basis points rich on the model, and go to an underweight if mortgages reach 15 basis points.”