By the Numbers

Strong 30-year excess returns in June

Brian Landy, CFA | July 7, 2023

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.

Agency MBS outperformed their Treasury hedges in June, continuing a trend that started in mid-May. Conventional 30-year excess returns came in positive across the stack with up-in-coupon positions generally faring better. Returns for Ginnie Mae 30-year MBS came in strongest in 3.5%s and 4.0%s and weakest in 2.0%s and 2.5%s. Conventional 15-year MBS posted negative excess returns for 1.5%s and only modestly positive for 2.0%s through 3.5%s, and the sector slightly underperformed Treasuries as a result. But 15-year MBS in 4.0% and higher coupons posted strong returns, comparable to 30-year MBS. Meanwhile, the FDIC has sold over two-thirds of its MBS portfolio and over 75% of its 1.5% and 2.0% pools, so future selling will focus more on 30-year 2.5%s and 3.0%s, 15-year 2.0%s and 2.5%s, and 20-year 2.0%s.

Strong 30-year excess return in June pull year-to-date results positive

Conventional 30-year MBS outperformed treasury hedges across the coupon stack in June (Exhibit 1). The strong performance also pulled year-to-date excess returns positive for all coupons. Monthly returns exceeded 50 bp for all coupons 3.5% and higher, and the 2.5% and 3.0% coupons were close to that mark. Only the 1.5% and 2.0% coupons lagged a little, possibly pulled down by FDIC selling in those coupons. Returns for the 5.0% coupon, which has been the production coupon for most of the year, have been the lowest year-to-date across coupons.

Exhibit 1. Conventional 30-year MBS excess returns (%)

Excess returns reported by the Bloomberg Barclays MBS Index, through 6/30/2023.
Source: Bloomberg, Santander US Capital Markets

Ginnie Mae 30-year excess returns also were positive in June (Exhibit 2). Like conventional MBS, performance was weakest at the bottom of the coupon stack. But the strongest returns came in the middle of the stack, in 3.5%s and 4.0%s. This may be due to limited supply in those coupons—the Ginnies in the FDIC’s MBS portfolio were mostly 2.0%s, 2.5%, and 3.0%s and most new pool issuance has been in 4.5%s and higher.

Exhibit 2. Ginnie Mae 30-year MBS excess returns (%)

Excess returns reported by the Bloomberg Barclays MBS Index, through 6/30/2023.
Source: Bloomberg, Santander US Capital Markets

Conventional 15-year excess returns did not fare as well as 30-year returns (Exhibit 3). The MBS portfolio the FDIC acquired from Silicon Valley Bank and Signature Bank was overweight 15-year MBS and most was in 3.0% and lower coupons. This may have weighed on performance in those coupons. And projected returns for 15-year MBS have generally been lower than for 30-year MBS, reducing interest in the sector.

Exhibit 3. Conventional 15-year MBS excess returns (%)

Excess returns reported by the Bloomberg Barclays MBS Index, through 6/30/2023.
Source: Bloomberg, Santander US Capital Markets

The FDIC is over halfway done selling agency MBS and CMOs

The FDIC has sold over two-thirds of its agency MBS portfolio (Exhibit 4). Most of the portfolio was held in 3.0% and lower coupons and was heavily invested in shorter duration 15- and 20-year MBS. The selling thus far has been weighted towards lower coupons. The FDIC has sold nearly 85% of its 1.5% coupon pools, including 100% of its 30-year and 20-year pools in that coupon. The FDIC has sold 79% of its 2.0% coupon pools and 70% of its 2.5% pools.

Exhibit 4. The FDIC has sold 69% of its SVB & SBNY Agency MBS portfolio.

Sales through 7/6/2023. Any upsizes included on lists through 6/23/2023.
Source: Black Rock, FDIC, Santander US Capital Markets

The remaining portfolio is more heavily weighted towards higher coupons than at the start of the sales. For example, in the conventional 30-year sector, the FDIC started with $10.3 bn 2.5%s and $6.6 bn 3.0%s, but now owns more 3.0%s than 2.5%s.

The FDIC started selling its CMO portfolio a little later than the MBS pool portfolio and has sold just about 50% (Exhibit 5). Most of the bonds were pass-throughs and sequentials, and the sales have focused on those categories. Over 80% of the pass-through bonds have been sold, and over 45% of the sequential bonds. The sales have included only a small number of PACs, floaters, and sequential Zs. The selling has been weighted a bit more heavily towards conventional CMOs than Ginnie CMOs.

Exhibit 5. The FDIC has sold 50% of its SVB & SBNY Agency MBS portfolio.

Sales through 7/6/2023.
Source: Black Rock, FDIC, Santander US Capital Markets

Brian Landy, CFA
brian.landy@santander.us
1 (646) 776-7795

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 © 2023 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.