MORTGAGES UNDERPERFORM BUT MAKE A COMEBACK


Poor liquidity continued to be quite noticeable in last week's mortgage-backed securities market, sources said, but mortgage bonds proved to perform fairly well versus other spread product, such as corporate and agency paper.

"However, mortgages did not do so well versus Treasurys on the week," said David Montano, a director of mortgage research at Credit Suisse First Boston. "But spreads versus swaps have tightened a little bit, perhaps two or three basis points."

Additionally, it was widely reported that 15-year collateral lagged 30-year collateral last week, and underperformed 30-year paper generally. Swap spreads were wider on the week by six basis points, observers said.

Both money managers and banks were seen buying mortgage-backed securities last week after the market absorbed the latest Consumer Price Index numbers later in the week.

According to sources, dealers were taking larger positions, though they still had relatively small holdings.

With a current coupon Fannie Mae of 7%, market sources said that mortgages did not look nearly as bad as they did approximately a year ago, when trouble first set into the market amid international devaluations.

"Swap spreads are near the wides of October 1998," Montano said, "but mortgages overall are still looking pretty good. A lot of it depends on what happens in swap spreads going forward. We've seen mortgages kind of lumbering along, with poor liquidity, and a potential tightening after the end of the quarter."

Further, mortgages are very much competing with corporate issues recently, mainly because of Y2K fears.

"I think Y2K is going to affect mortgages only indirectly," said an MBS trader. "It is going to affect corporate debt much more. In fact, there is a potential for swap spread tightening, and mortgages benefiting as a consequence. But on the other hand - there might be no demand."

Still, another MBS veteran called Y2K a "self-fulfilling prophecy," one that seemed to become more ominous the more it was discussed.

"If we just get through October safely, at least in the equity markets," said the source, "then I don't think fixed-income will have much to worry about."

CMBS Deals Price

In other news, Commercial Mortgage Acceptance Corp. priced a $734 million commercial mortgage-backed securitization late last week, despite spreads widening.

The CMAC deal was underwritten by Morgan Stanley Dean Witter and included loans from Midland Loan Services Inc., Residential Funding Corporation (RFC) and CIBC Oppenheimer.

It is backed by 242 loans concentrated in less volatile asset types, such as multifamily (33.8%), industrial and self-storage (14.1%), and anchored retail (14.7%). The pool has relative low leverage with a loan-to-value (LTV) ratio of 86.3%.

The deal priced about five basis points wider than price guidance, with the five-year triple-A piece at 120 basis points over Treasurys, the 10-year triple-A at 138 over, the double-A at 155 over, single-A at 175 over, A-minus at 185 over, triple-B at 210 over and triple-B-minus at 295 over.

Prudential Securities Secured Financing Corp. is expected to follow the CMAC deal with an $875 million securitization early next week. The deal is being underwritten by Prudential Securities and includes loans from Greenwich Capital Financial Product Inc., National Realty Finance L.C. and Bridger Commercial Realty.

The 10-year triple-A tranche received price guidance at 132 over Treasurys. Traders expect that the deal's 10-year triple-A tranche to price around more than 138 over Treasurys. - AT