By the Numbers

Benchmarking relative value in MBS and corporates

Brian Landy, CFA | October 27, 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. This material does not constitute research.

Nominal and option-adjusted spreads on MBS have reached some of the widest levels in years while spreads in some corners of the corporate market trade at the tight end of their spread distribution. Among others, energy, metals and mining, pharmaceuticals, railroads, restaurants and transportation services all trade tight. The difference in spreads gives MBS a big head start in projected returns, and the ability to hold a return advantage over broader moves in rates.

Wide nominal spreads give MBS a big head start in a base scenario of no change in rates with most MBS maintaining a projected return advantage over shifts in the yield curve of up to 100 bp (Exhibit 1)

Exhibit 1. Projected total returns in MBS top some of the tightest corporates.

Note: All market levels as of 24 Oct 2023 close. Projections assume a parallel linear shift in the yield curve to the horizon, reinvestment in Treasury bills, repricing at constant OAS.
Source: Yield Book, Santander US Capital Markets.

Fannie Mae and Freddie Mac senior long-term debt is rated Aaa by Moody’s and AA+ by S&P. Their mortgage-backed securities are generally considered to have less credit risk since the bonds are collateralized by principal and interest payments on home mortgages. Therefore, their MBS pools are not rated by either ratings agency. Ginnie Mae MBS carry the full faith and credit of the United States government and is also not rated.

This $1.3 billion Coca Cola issue trades at a g-spread of 33 bp, inside its life-to-date average of 44 bp. Projected returns in a duration- and proceeds-neutral portfolio of this issue and 10-year Treasury debt lag 30-year 5.5% pass-throughs across shifts in rates.

Exhibit 2. Coca Cola KO 1 03/15/28.

All market levels as of 24 Oct 2023 close; indicative pricing only. Ratings for Moody’s/S&P; MBS ratings reflect credit ratings on Fannie Mae and Freddie Mac corporate debt.
Source: Yield Book, Santander US Capital Markets

This $598 million Chevron issue trades at a g-spread of 47 bp, inside its life-to-date average of 59 bp. Projected returns in this issue underperform a duration- and proceeds-neutral portfolio of 30-year 6.0% pass-throughs and 10-year Treasury debt across shifts in rates.

Exhibit 3. Chevron CVX 3.85 01/15/28.

This $1.0 billion Disney issue trades at a g-spread of 54 bp, inside its life-to-date average of 68 bp. Projected returns in this issue underperform a duration- and proceeds-neutral portfolio of 30-year 6.0% pass-throughs and 10-year Treasury debt across shifts in rates.

Exhibit 4. Disney DIS 2.2 01/13/28.

This $991 billion Kenvue issue was issued in September. Projected returns in this issue underperform a duration- and proceeds-neutral portfolio of 30-year 6.0% pass-throughs and 10-year Treasury debt across most shifts in rates, although slightly outperforms if rates increase 100 bp.

Exhibit 5. Kenvue KVUE 5.05 03/22/28.

This $1.05 billion McDonald’s issue trades at a g-spread of 77 bp, inside its life-to-date average of 90 bp. Projected returns in a duration- and proceeds-neutral portfolio of this issue and 10-year Treasury debt lag 30-year 5.5% pass-throughs across shifts in rates.

Exhibit 6. McDonald’s MCD 3.8 04/01/28.

This $500 million Deere & Co. issue trades at a g-spread of 47 bp, inside its 5-year average of 81 bp. Projected returns in this issue underperform a duration- and proceeds-neutral portfolio of 30-year 5.0% pass-throughs and 10-year Treasury debt across most shifts in rates, although underperforms if rates increase by 100 bp.

Exhibit 7. Deere DE 5 3/8 10/16/29.

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

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