Uncategorized
The case for reallocating from 30-year MBS to 15-year
admin | March 6, 2020
This document is intended for institutional investors and is not subject to all of the independence and disclosure standards applicable to debt research reports prepared for retail investors. This material does not constitute research.
Spreads on 15-year pass-throughs routinely underperform 30-year pass-throughs as refinancing activity picks up and expected 15-year net supply rises, and the current market is showing the same. The lagging spreads come despite 15-year pools tendency to show lower prepayments and better convexity. For banks and money managers, spread levels look good for reallocating from 30- to 15-year paper.
The typical OAS difference between par 30- and 15-year paper has moved toward its narrowest point in a year with 15-year pass-throughs recently trading only 5 bp tighter than 30-year (Exhibit 1). The difference was only smaller in the last year when it hit 4 bp on Sep 24. Fifteen-year paper on average in the last year has traded 13 bp tight to 30-year.
Exhibit 1: The typically shorter duration and better convexity of 15-year pools now trades only 5 bp inside 30-year
Note: data as of 3/5/20 COB. Source: Bloomberg, Amherst Pierpont Securities
The typical yield advantage in 30-year paper still holds, with par 30-year zero-volatility spreads around 10 bp wide to 15-year (Exhibit 2). However, the average zero-volatility advantage in the last year has been more than 26 bp. The market now requires a smaller yield concession to go from 30- to 15-year paper.
Exhibit 2: Nominal spreads between 30-year and 15-year pass-throughs also are narrow
Note: data as of 3/5/20 COB. Source: Amherst Pierpont Securities
Fifteen-year pools typically show more convexity than 30-year, and that has held recently. Since primary rates on 15-year mortgages typically run 40 bp to 50 bp below rates on 30-year, prepayment comparisons typically pit a given 30-year coupon to the 15-year coupon 50 bp lower. Prepayments on Fannie Mae’s 30-year 3.5%s of 2018, for example, have shown more negative convexity than 15-year 3.0%s of 2018 (Exhibit 3). The 15-year paper prepaid faster than 30-year when the two coupons traded below par in 2018 and slower when they traded at a premium afterwards.
Exhibit 3: Prepayments in 15-year pools typically show better convexity than 30-year pools with comparable rate incentives
Source: Amherst Pierpont Securities
Based on spreads between par 30- and 15-year paper last fall, 15-year paper could widen slightly more to 30-year. Spreads on par 15-year pass-throughs last fall moved to 8 bp wide to 30-year. But the most likely path would have 15-year paper tightening after refinancing activity peaks. After refinancing peaked last fall, par 15-year paper moved to 8 bp tight to 30-year, a 16 bp swing.
This material is intended only for institutional investors and does not carry all of the independence and disclosure standards of retail debt research reports. In the preparation of this material, the author may have consulted or otherwise discussed the matters referenced herein with one or more of SCM’s trading desks, any of which may have accumulated or otherwise taken a position, long or short, in any of the financial instruments discussed in or related to this material. Further, SCM may act as a market maker or principal dealer and may have proprietary interests that differ or conflict with the recipient hereof, in connection with any financial instrument discussed in or related to this material.
This message, including any attachments or links contained herein, is subject to important disclaimers, conditions, and disclosures regarding Electronic Communications, which you can find at https://portfolio-strategy.apsec.com/sancap-disclaimers-and-disclosures.
Important Disclaimers
Copyright © 2024 Santander US Capital Markets LLC and its affiliates (“SCM”). All rights reserved. SCM is a member of FINRA and SIPC. This material is intended for limited distribution to institutions only and is not publicly available. Any unauthorized use or disclosure is prohibited.
In making this material available, SCM (i) is not providing any advice to the recipient, including, without limitation, any advice as to investment, legal, accounting, tax and financial matters, (ii) is not acting as an advisor or fiduciary in respect of the recipient, (iii) is not making any predictions or projections and (iv) intends that any recipient to which SCM has provided this material is an “institutional investor” (as defined under applicable law and regulation, including FINRA Rule 4512 and that this material will not be disseminated, in whole or part, to any third party by the recipient.
The author of this material is an economist, desk strategist or trader. In the preparation of this material, the author may have consulted or otherwise discussed the matters referenced herein with one or more of SCM’s trading desks, any of which may have accumulated or otherwise taken a position, long or short, in any of the financial instruments discussed in or related to this material. Further, SCM or any of its affiliates may act as a market maker or principal dealer and may have proprietary interests that differ or conflict with the recipient hereof, in connection with any financial instrument discussed in or related to this material.
This material (i) has been prepared for information purposes only and does not constitute a solicitation or an offer to buy or sell any securities, related investments or other financial instruments, (ii) is neither research, a “research report” as commonly understood under the securities laws and regulations promulgated thereunder nor the product of a research department, (iii) or parts thereof may have been obtained from various sources, the reliability of which has not been verified and cannot be guaranteed by SCM, (iv) should not be reproduced or disclosed to any other person, without SCM’s prior consent and (v) is not intended for distribution in any jurisdiction in which its distribution would be prohibited.
In connection with this material, SCM (i) makes no representation or warranties as to the appropriateness or reliance for use in any transaction or as to the permissibility or legality of any financial instrument in any jurisdiction, (ii) believes the information in this material to be reliable, has not independently verified such information and makes no representation, express or implied, with regard to the accuracy or completeness of such information, (iii) accepts no responsibility or liability as to any reliance placed, or investment decision made, on the basis of such information by the recipient and (iv) does not undertake, and disclaims any duty to undertake, to update or to revise the information contained in this material.
Unless otherwise stated, the views, opinions, forecasts, valuations, or estimates contained in this material are those solely of the author, as of the date of publication of this material, and are subject to change without notice. The recipient of this material should make an independent evaluation of this information and make such other investigations as the recipient considers necessary (including obtaining independent financial advice), before transacting in any financial market or instrument discussed in or related to this material.
