Supply Re-enters MBS Market


In what has been an unanticipated slow start to the year due to unusually low early-year supply, the mortgage-backed securities market has seen a small increase in some supply this week. It is still a strong market nonetheless.

"The mortgage bankers came in yesterday, and we saw some supply," said Art Frank, head of MBS research at Nomura Securities. "In spite of that, mortgages are doing very well. We're tighter to swaps, we're tighter to agency benchmarks. We're a little ahead of ourselves vis-a-vis competing spread product."

"There's still many accounts on the sidelines, waiting to see the direction the market takes," added David Montano, director of MBS research at Credit Suisse First Boston. "I expect liquidity and trading volume should be increasing."

"We saw a return of second-tier banks starting back in, typically in some higher coupons. Seasoned higher coupons were preference," said John Carson, head MBS trader for Morgan Keegan.

Investors have not been too keen on discounts, as they look cheaper than current coupon, which are 7.5s and 8s. Montano has definitely seen an up in coupon over the past few weeks, but feels there may be an imminent slight move down in coupon.

"A lot of investors have tended to go to the higher coupons to enhance yield. They're comfortable with the higher yields, and not that concerned about convexity," he said. "I'm getting a sense that there's going to be a slight move down in coupon. Just out of basically nervousness, people are overweighing the higher coupons and out of safety, there's some safety; there's some selling in those coupons."

Frank also sees the discounts as cheap. "6s and 6.5s to us look a little bit on the cheap side." As for mortgages in general, "I wouldn't say they were a sell, but they're more a hold than a buy, not so much against Treasurys, but against competing spread products, swaps and agencies specifically."

"The seasoned 15-year paper is trading cheap to the TBA. Parts of the cheapest discounts right now are in seasoned 15-years," added Montano. "People are comfortable with the seasoned story in 15-years, whereas 30-year seasoned paper has been trading at fairly rich levels for quite some time."

As for a highly expected Federal Reserve rate hike in February, Carson does not see that wreaking any havoc with mortgages. "We're at seasonal lows in production, and it's still the highest yielding agency-risk product out there," he said. "There's reasonable demand and very little supply. It's not a big issue. Everyone expects 25 basis points [increase]. I don't think many people find the immediate jump to 50 basis points very convincing."

And Now For A Commercial Break

Several panelists announced forthcoming CMBS deals at the Naples conference last week. J.P. Morgan & Co. will be coming to market with a structured transaction in conjunction with U.K. company Prologis. The deal should hit in the second quarter. Additionally GE Capital Real Estate will be teaming up with Chase Manhattan in February or March for a conduit, according to Constantino Corologos of GE.

Additionally, Corologos was bullish on CMBS product for 2000, forecasting $55 billion total, broken down as follows: $30 billion in conduit/fusion deals, $10 billion in large-loan transactions, $5 billion in floating-rate deals and $10 billion in other types (credit tenant lease or international).