HUMPHREY-HAWKINS CAPS LOUSY WEEK FOR MORTGAGES
July 26, 1999
Mortgage securities took a hit late last week following Federal Reserve Chairman Alan Greenspan's Humphrey-Hawkins testimony, spurring a sustained selling spree and a lack of buying.
"Mortgages had a terrible day," said one MBS trader last week. "Selling like this just trashes things."
In one day, current coupon mortgage spreads widened by five basis points as institutional investors, traders and bankers sold off mortgage securities.
Though many market players worried that Greenspan's comments indicated a further bias toward tightening monetary policy - which would mean a 25-basis-point rate hike in either August or October - other participants thought that the Street's reaction was overblown.
"People were overreacting, and just obsessed with the upcoming August Fed meeting," said one MBS veteran. "It's just that liquidity is so poor nowadays that it is easy to have exaggerated reactions to this.
"It is as if the market is a big revolving door and the size of the door has shrunk recently. So when people want to go through the door, everybody tries to pile through the same way."
Other sources noted that the market actually came off its lows last week, despite a slump in mortgage bonds.
According to market players, ten-year mortgage bonds underperformed Treasurys by four or five basis points, and the option-adjusted spread on 7% coupons were wide by four basis points.
"But it is more a liquidity thing, where if you don't have the people to buy, the Street steps in to act like an intermediary," said MBS expert. "You saw a lot of originators selling and there was minimal buying. But I don't think that the Humphrey-Hawkins testimony should have been much of a surprise to anybody."
Additionally, market participants mention that the corporate and asset-backed markets have been inundated with supply recently. According to Securities Data Co., about $130 billion in corporate debt has been issued since mid-May and about $61 billion in asset-backed debt has been sold.
No Appetite for CMBS, But Interesting Deals
On the CMBS front, Prudential Securities Secured Financing Corp. priced its Series 1999-C2 commercial mortgage passthrough certificates, though the deal was reported to have had difficulty and much wider spreads than expected.
The mixed reactions to recent deals have worried issuers who are preparing deals slated for the next few months.
Capital Lease Funding and Banc of America Securities are slated to launch a $400 million credit-tenant-lease CMBS deal at the end of this month, sources say.
Though worries exist because of perceived lack of investor interest, some upcoming transactions are still turning heads because of their uniqueness.
According to market sources, the John Hancock deal, slated for next month, will give participants a rare opportunity to own life company-underwritten transactions.
"Typically, life company deals have performed well," said Michael Youngblood, Banc of America Securities's managing director of real estate.
Additionally, it is expected that people will be interested in the upcoming Starwood transaction because it is an issue of a public company, and therefore crossover participation is expected.
Banc of America's Tier 1 NationsLink Funding Corp. deal, due out by the end of the month, should attract attention as well because it is the only Tier 1 transaction that was scheduled in July.
The Capital Lease deal is also expected to garner attention because cap bonds are longer than conduits, have better call protection and are rooted in a corporate counter- party - not merely in a real estate transaction. - AT