Re-Visiting the 20yr Sector
The MBS market has become demonstrably cheaper over the past three weeks. At the same time, overall market risk is demonstrably higher after a large move higher in Treasury prices and a corresponding increase in both realized and further expected prepayments. In this article, we advocate for an approach that balances the need to remain fully invested at these wider spreads with the inherent prepayment and market risks that exist at these levels.
Month-to-date, conventional 30yr and 15yr production coupon MBS has underperformed UST and swap hedge ratios. 2-4yr CMO spreads are 2-3bps wider since July. Hybrid spreads are 9bps wider. The payups for loan balance specified pools 3.0s-5.0s increased 10-22 ticks since the end of last month. 100% NY specified pools 3.5s-4.0s increased 7-12 ticks. Fixed prepayment speeds increased in July by 25.6%. The increase is due to lower primary mortgage rates during the refinance window and a higher day count by two business days.