End of QE May Benefit MBS vs Corps

October 31st, 2014 10:27 am | by John Jansen |

Via Bloomberg:

IG Corp Investors May Turn to MBS Sector, BNP’s Lohokare Says
2014-10-31 14:08:48.811 GMT

By Christopher Maloney
Oct. 31 (Bloomberg) — IG corporate investors may
reallocate back into MBS with QE3’s end and continued Fed
reinvestments likely to buoy mortgages, BNP Paribas MBS
strategist Anish Lohokare writes in client note.
* MBS should tighten over next few months in response to
“stock effect potential” of Fed buying
* Since QE3 announcement, Citigroup Corp index has seen 682bps
in excess return vs 56bps for MBS (ex-impact of dollar
rolls)
* “Tide appears to have turned” in favor of MBS since
Sept.; YTD returns (up to Oct. 29) now 44bps excess for
credit, 67bps for MBS
* MBS ZV spreads ~15bps cheap
* MBS ZV spreads ~15bps cheap</li></ul>
* IG Corp excess returns “significantly more volatile” than
MBS due to the former’s greater spread, carry and
vulnerability to HY re-pricing, global growth concerns and
monetary policy efficacy
* Credit spreads still tight on historic basis vs MBS; central
bank “distorting rate markets” has left many IG-
constrained investors overweight U.S. corporates
* Many MBS investors underweight, with just ~$50b net supply
likely next year will reinforce Fed’s stock effect on sector
* ECB disappointing market U.S. credit will likely move wider
in sympathy with Europe; mortgages less exposed due to
continued Fed buying
* Marginally weaker fundamentals, central bank policy will
keep corporates more volatile over the next few months while
Fed stock effect on MBS holders will begin to exert itself
* Possible retail selling towards year-end could pressure IG
spreads
* Spread change correlation between corporates and MBS seems
to have decoupled (~15%); MBS offers diversification benefit
* MBS offers better liquidity, with trading volumes as pct of
outstanding bonds ~2x that of corporates

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