Bank restructurings in the second half of last year contributed to a net decline in MBS holdings at banks, UBS analysts said in recent research.
Selling was primarily in lower coupon MBS, some of which was offset by the purchase of higher coupons. The lack of support has caused certain sectors traditionally favored by banks - such as seasoned 15-years - to have become very cheap, analysts said. They expect, however, to see some realignment as the bulk of restructurings are done. The sector is also seen as attractive enough for TRR money managers to enter.
The firm likes both seasoned agency and non-agency 15-year passthroughs. While not huge quantities are available, analysts note that every dealer has some and that larger blocks are usually available in non-agencies.
The analysis shows that seasoned 15-year paper is cheap to TBA 15-year currently. The OAS on a TBA DW 5 is currently negative13 basis points versus seven basis points over on the seasoned paper, equivalent to a total of 20 basis points higher.
Analysts also point out that the equal OAS pay-up should be 30 ticks, and not the over eight ticks currently charged. At this pay-up, seasoned paper and TBA offer the same yield. UBS analysts believe the pay-up should be higher given that the seasoned paper has much better convexity. For example, in a sell off, speeds should be faster, as there is higher accumulated home price appreciation, while in a rally, speeds are likely to be slower due to lower loan size and the fact, the collateral has been exposed to previous refinance opportunities.
Meanwhile, non-agency 15-years trade 13 to 14 ticks behind agency paper of the same seasoning, UBS analysts said. While speeds on discounts may be somewhat understated, resulting in OAS's that are a bit high, analysts said, "There is no question that the paper represents excellent value."
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