Uncategorized
Near par, 15-year MBS lags 30-year MBS
admin | January 31, 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.
Spreads on 30-year MBS have tightened to 15-year MBS since mid-January by almost 13 bp, which is the lowest level since early September and close to the lowest levels of the last year. Investors looking for shorter duration MBS suddenly have something to consider as an alternative to 30-year near-par MBS: investing in 15-year near-par MBS.
The spread between par 30- and 15-year MBS has collapsed
On January 17, the spread between the 30- and 15-year mortgage current coupons stood at 43 bp and had traded close to that level since the beginning of October. But since then the spread has plummeted to 29 bp (Exhibit 1). The current level comes close to the lows of 2019, which came in early September when markets were roiled with concerns about an inability to reach a trade agreement with China.
Exhibit 1: The spread of 30- to 15-year MBS has tightened sharply lately
The 30 yr/15 yr basis is the spread between the 30 yr and 15 yr mortgage current coupons. Source: Fannie Mae, Freddie Mac, eMBS, Amherst Pierpont Securities
The price of 15-year 2.0%s has significantly underperformed 30-year 2.5%s since mid-January. Most 15-year MBS tend to have durations similar to the 30-year MBS with a coupon 50 bp higher, so these prices generally move together. But there has been very little supply of 15-year 2.0% MBS, and only $15.5 billion of pools eligible for TBA delivery. As interest rates have dropped, most market participants are not yet treating the 15-year 2.0% as the production 15-year coupon and seem reluctant to price 15-year 1.5%s. This is pressuring the FNCI 2.0% contract to remain slightly below par and is preventing it from repricing fairly with the FNCL 2.5% TBA. But if interest rates remain at or below current levels for a while, this is likely to correct and the FNCI 2.0% contract should re-price higher.
The yield curve has flattened as well, from 20.3 bp on January 17 to 17.8 bp on January 30. In a flatter curve, 15-year MBS should underperform partly because of their higher exposure to 5-year and shorter key rate duration and arguably because a flatter curve can induce borrowers to refinance into 30-year mortgages from 15-year mortgages. Nevertheless, the 30-year to 15-year mortgage basis appears tighter than typical for the current shape of the yield curve (Exhibit 2).
Exhibit 2: The curve suggests the basis between 30- and 15-year should be wider
Data since 1/1/2019. Source: Fannie Mae, Freddie Mac, eMBS, Amherst Pierpont Securities
15-year 2.0%s and 2.5%s look cheapest
The FNCI 2.0% appears to be the most attractive part of the stack (Exhibit 3). They now trade 20/32s behind FNCL 2.5% with the 30-year paper just above par. When FNCL 3.0%s traded near bar, the comparable 15-year coupon traded at roughly the same price as the FNCL 3.0%s. And when FNCL 3.5%s traded near par, the comparable 15-year coupon again traded at rough the same price at the 30-year paper. The current lagging price on FNCI 2.0%s is striking.
Exhibit 3: FNCI 2.0%s and 2.5%s look cheapest
The price spread of each coupon is calculated relative to the 50 basis point higher FNCL TBA and plotted against the FNCL TBA’s price. A wider price spread indicates the FNCI is cheaper relative to the FNCL contract. Data since 1/1/2019. Source: Fannie Mae, Freddie Mac, eMBS, Amherst Pierpont Securities.
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.
