We analyse how mortgage-backed securities (MBS) issued by U.S. agencies have modestly improved in April compared with the previous month’s weak performance as the fall-out from the banking crisis continues.
- Federal Depository Insurance Corporation (FDIC) sales from bank seizures have been taken in stride.
- Index total returns were positive, slightly negative to Treasuries as rates steadied.
- An examination of the SVB/Signature portfolios.
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Fallout from SVB/Signature results in MBS auctions
U.S. agency mortgage-backed securities (MBS) recovered slightly from a poor prior month, with April returns positive in Total Return yet trailing on Excess Spread. Overall, the markets sought to regain their footing from March’s headline “tape bombs” of regional and international banking failures.
The fates of SVB/Signature banks caused the Federal Depository Insurance Corporation (FDIC), to seize the assets of those banks toward the end of March. The FDIC has since commissioned Blackrock FMA to conduct MBS pool sales beginning April 18, 2023. The pace has targeted sales of $1.5 billion to $2 billion per week, with frequency increasing to 3 days per week and dollar amounts going up as well.
Auctions have proceeded via “bid wanted” lists on the Tradeweb electronic trading system, with ample advance notice given out to all interested buyers. In some cases, winning bidders are offered the option of “upsizing” their winning bids (increasing amounts). No noticeable market widening was seen in the first weeks, likely due to the initial smaller offering sizes. Stay tuned.
MBS index performance Total Return for April was an impressive +50bps, yet Excess Return to the duration neutral Treasury index was -13bps as prices fell into month end and indexers faded. 10yr yields rose 4 basis points to 3.42%, the slope of the 2s10s yield curve flattened further 7 basis points to -58.3. Volatility measures saw 3m10y Vols (normalised) lower 7bps to 112.0.
Originator supply increased 4.2% from last month to $2.52 billion per day, as housing enters its “buying season” with more prospective homeowners on the prowl for new dwellings. The 30yr primary rate was slightly higher to 6.43% by month-end (FHLMC PMMS), and Bankrate’s daily quote has fallen off its March highs (7.13%) to just inside 6.90%.
Current coupons remain entrenched on 30yr 5%s, 5.5%s and 6%s (81.5%), with lower 5%s taking on a more substantial bite of the production (34.09%).
Overseas demand has been tepid at best, with Japanese banks balking at the still frothy dollar prices as prices on the 30yr coupon stack remain one to two full points above last month’s opening lows. Money Managers are present as sellers of the “belly” along 4%s and 4.5s versus the wings (3.5s/5%s).
What is the FIDC tasked to sell?
Since early March, the FDIC has been in control of the portfolios of both SVB and Signature banks. Their mission was, and is, to “protect depositors and preserve the value of the assets and operations” of said banks and possibly “improving recoveries” for creditors.
In terms of the last item, recoveries now include the sales of the assets, notably fixed income MBS pools (of loans), where auctions have already begun.
Given the mortgage portfolio size ($61 billion) and the number of line items (1,600+), that process will last well into year-end.
The first auction totalled $291.8 million in 3 groups of collateral: 30yr FNMA 2.5%s and 30yr FNMA 3%s. All three groups sold on the offer side, with the last group of a more specific geographic concentration (Texas Only), which carried a “specified” pool pay-up associated with that locale.
We thought it helpful in general to summarise what the FDIC and their auctioneer (Blackrock) must liquidate:
Putting aside the context of “deliverable” versus “non-deliverable” for our discussion, the breakdown is $29.5 billion 30yr MBS, $15.5 billion 15yr MBS and $10.1 Billion 20yr MBS.
Of the $30 billion 30yr MBS, the concentration in coupons is 83% from 30yr 2%s, 2.5%s and 3%s. Those coupons were bought at or near par ($100), but now carry market prices of $83, $86 and $89.
In any banking model, putting deposit money to work often entails investing in longer terms assets; borrow short and lend long. The net spread on deposit income is used as a hedge to longer investments (MBS, in this case). Providing that deposits don’t withdraw en masse, and rates don’t precipitously shock, that formula survives.
SVB’s clientele were mainly startups/tech firms, whose cash needs were erratic, meaning longer-term assets had to be more actively managed in case the traditional hedge failed-it did.
Month to date
Spreads were wider all month, still absorbing the greater shocks of March. However, rates ultimately found their level and widening was contained by mid-month. Overall, there seemed limited impetus to tighten from there as trepidation bested demand.
The 30yr current coupon (30yr CC) increased 14bps (to 5.19%), OAS was net wider 21bps (49.1) after previously touching +50. ZV (Zero Volatility) spreads were 15 wider (155), and the closely followed correlation to 5&10yr Treasury blend collapsed into month-end to finish +19bps softer 169.
Year over year (YoY)
Results encompassed both global turmoil (Russian invasion of Ukraine) as well as domestic events (bank failures). As such the 30yr CC level rallied to the lows and has since retraced +107 basis points, OAS was moderately net wider 17bps, ZVs out 42bps, and vs the 5&10yr treasury blend +47bps.
