Analysing the state of mortgage-backed securities (MBS) following the market volatility resulting from the collapse of SVB and Credit Suisse.
- The MBS market lagged on the SVB, Signature Bank and Credit Suisse crisis.
- The index experienced its worst month since last August. The actions of the Federal Open Market Committee (FOMC) in March have inspired selling.
- The To Be Announced (TBA) coupon stack option-adjusted spread (OAS) is in the 25-75 percentile range, still back from the highs/wides.
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Rollercoaster market leaves MBS at the bottom
In March, U.S. agency mortgage-backed securities (MBS) were stifled by volatility again and this time on a macro level.
Events outside the MBS arena, which included regional banks SVB and Signature entering into receivership and Credit Suisse’s brokered sale to UBS, unnerved embedded call holders.
Mismanagement was at the root cause of most of those incidents and MBS spreads widened against the possibility of a $60bn+ FDIC sale of “held to maturity” (HTM) agency MBS.
Banks traditionally use par-based collateral (30yr FNMAs) to match longer liabilities, with consensus that SVB’s HTMs were likely FNMA (Fannie Mae) 2 percent or 2.5 percents (2020, 2021 issue), which is now 15-18 points under par ($100).
The OAS (option-adjusted spread) widened 15 basis points (bps), 3m10y vols spiked 40bps higher, as U.S. 10yr note yields dropped 59 bps to 3.47 percent, and the 2s/10s curve “steepened” +32bps to net -56.10. Overall, MBS Index total returns were +193 bps yet -103bps in excess spread to rallying Treasuries.
Originator supply increased 11.8 percent from last month to $2.42bn per day, as lower rates and rallies sparked some pipeline expansion.
The 30yr primary rate fell 33bps to 6.32 percent (FHLMC PMMS), while Bankrate’s daily quote dropped to the 6.94 percent context.
Current coupons continue to be focused on 30yr 5 percents, 5.5 percents and 6 percents (83.3 percent), with the wings along 4.5 percents and 6.5 percents amounting to 13.5 percent of hedging production.
Into the widening, money managers and hedge funds exacerbated the move with late-day sales after the U.S. Fed‘s rate hike (+25bps).
Asia has been noticeable in overnight sessions, often buying GNMA II 5.5 percents, outright and on swap versus FNMAs. After the bank implosions, those “real money” accounts took a modest pause on accumulating par-based collateral – for now anyway.
MBS stack OAS, by coupon, for March
Headline risk was a big factor this month, with even collateralised cash flow instruments (like MBS) not impervious to knee-jerk macro widening. The moves to MBS coupons were abrupt, correlated to MBS and price rallies, and levelled off by month end.
From the first chart, OAS levels across the bulk of the TBA coupon stack (30yr 2 percents through 5 percents), show measures spiking wider as SVB and Signature Bank went into receivership on 10 March 2023.
Spreads gapped 40-50 percent from the start of the month, held steady for the next two weeks, and then leaked wider into month end and quarter end (and Japanese FYE). The moves were most dramatic along lower 2.5 percents where bank HTM holdings were largely focused.
In the second graphic, the percentile table, derived from a five-year look back, we see most coupons ranged in the 25 percent to 75 percent percentile bracket, with all well off the highs reached when COVID-19 restrictions hit (19 March 2020).
Month to date: Spreads had a choppy month, given all the external noise surrounding the markets, as levels did stabilise after the bank failures yet widened again post-Fed rates increase of +25bps on 23 March. Ultimately, against a rallying and flatter curve, most MBS coupons found limited support.
The 30yr current coupon (30yr CC) fell 46bps (to 5.05 percent), OAS spreads held steady to 27.2, ZV (Zero Volatility) Measures were about flat at 14, while the closely followed correlation to 5&10yr Treasury blend was 2bps wider to 149.
Year to date: Results were about the same overall, as the 30yr CC level has lowered by 40bps, the OAS is wider by 14bps, ZVs are out 7bps, and versus the 5&10yr treasury blend are +13bps.