MBS
January 5th, 2009 11:56 am | by John Jansen |Mortgages are “en fuego ” this morning. One dealer reports that they are 1/2 point to 5/8 point better versus Treasuries.
The Federal Reserve was in buying this morning and that activity stoked the fire. One dealer noted that the Federal Reserve bought coupons as low as 4 percent.
Another trader noted that last week when the 10 year yield retreated over 30 basis points on Wednesday and Friday, that mortgages barely budged. Low coupon instruments declined about 1/4 point while high coupons were 1/8 point to 1/4 point higher.
That trader suggested that in addition to the Federal Reserve System purchases mortgages were benefiting from an infusion of TARP money into the sector. That trader though that until the economic air has cleared MBS is a better asset than many loans.
2 Responses to “MBS”
By Redball on Jan 5, 2009 | Reply
Is there any upside to this. If so, is there an ETF, fund or stock to take advantage of this?
By Mike on Jan 6, 2009 | Reply
Be careful…MBS performance is usually quoted in RELATIVE terms (e.g. “…1/2 point better than treasuries”…see above).
MBS are an exotic product…they have negative convexity, credit risk (yes, fannie, freddie, etc can still go bust), are sensitive to the swaption market (i.e. to implied volatility), and have a prepayment exposure which no model in the world can predict.
So the only safe way to play the relative MBS outperformance would be to hedge them at least vs treasuries and versus implied vol. This you cannot do on your own.
The only other way is to go via a fund. PIMCO is reported to have a big overweight on MBS. Since they align their strategy across ALL funds, you can expect ALL of their funds to have MBS overweights (incl the stock and commodities index funds they manage. yes, better believe it, this is how they get the alpha).
I recommend them for their deep MBS expertise, but I am biased of course, since I used to work there.