No Recovery In Sight for Lackluster MBS Week
August 2, 1999
An uncertainty over interest rates following Federal Reserve Chairman Alan Greenspan's complete Humphrey-Hawkins testimony, as well as ever-widening swap spreads and a rising index of employed costs, or ECI report, from the Labor Department, capped off an uncertain week in which mortgages ultimately fell along with U.S. Treasurys.
"Most of the spread product is in shorter maturity instruments," said one MBS trader. "People in corporates say there is lots of good demand out there, but we don't really see that in mortgages.
"I just don't think the demand is there. There is more of a demand that investors' funding is done before the fourth quarter of the year."
Several portfolio managers mentioned that they don't foresee a turnaround anytime soon, especially since mortgages are so intricately tied to what is going on in the swap market.
In addition to sales by lenders, some trading accounts also sold mortgage-backed securities early on, said Art Frank, head of MBS research at Nomura Securities.
Meanwhile, the employment cost index - the broadest measure of wage, salary and benefit costs - grew 1.1% after rising an unrevised 0.4% in the first quarter, Labor Department figures showed.
Traders therefore sold bonds because the ECI suggested the tight labor market is leading to higher costs that can spur inflation, which can diminish the value of a bond.
Seasoned 15-year paper seemed to be the most active last week, with some buying on the wides, which caused a little bit of tightening earlier in the week.
"The market is still very edgy," said David Montano, a director of mortgage research at Credit Suisse First Boston. "Those investors who thought they hit rock bottom began to buy. So we did see a reasonably significant amount of activity, particularly in 15s."
MBS Deals Launch, Price
The latest Morgan Stanley Dean Witter commercial MBS deal priced last week, with the triple-A-rated 10-year tranche at 150 over the curve, and the triple-A five-year class at 130 over.
"This was a very strong deal from a collateral perspective, one of the best we've seen in the market," said a CMBS portfolio manager. "The triple-A securities had 20.25% subordination - the second lowest we've ever seen." Still, the deal priced wider than expected, clueing investors into the obvious fact that there is a definite weakness in the market at this time.
"Investors are reluctant to put money to work," said the source. "When one of the best deals in the market prices that wide, it is a good sign that we have some more widening to go."
The Morgan Stanley/(former) Banker's Trust $665 million Marriott Hotel transaction - which includes as collateral five hotels, such as New York's Marriott Marquis and Drake hotels - had not priced yet at press time, but price talk on the 5.6-year tranche was between 135 basis points and 140 basis points over the curve, sources say. Price talk on the 10-year triple-A was 160 over.
On the residential securitization side of the market, a mortgage collateralized bond obligation from lead manager PaineWebber Inc. for $1.5 billion was launched, with John Hancock subsidiary Independence Fixed Income Associates as the money manager, sources said.
The $50 million double-A-rated five-year was said to price late in the week at three-month Libor plus 275 basis points. The $45 million non-rated piece priced at three-month Libor plus 16.5%.
The deal will have $1.3 billion in commercial paper as a revolver. With the shelf name of Seneca, this is the second such mortgage deal put out by Independence. The collateral is made up mostly of MBS, but also includes short-life asset-backed securities, short sequentials, and planned amortization class bonds. - AT