Agency MBS：Don’t change the channel， we’ll be right back

Investment Rating - The report maintains a positive outlook on Agency MBS, with a raised total 2024 mREIT demand forecast to $20 billion from an initial $0 billion, indicating a favorable investment environment [31][38]. Core Insights - Agency MBS tightened this week due to a dovish FOMC press conference and weak economic data, resulting in rates falling by approximately 20 basis points across most of the stack [2][4]. - The market is currently pricing in slightly more than three rate cuts this year, which is expected to relieve some pressure on bank deposits and make MBS more attractive to FX-hedged buyers [2][4]. - mREITs added about $7 billion in Agency MBS in Q2, driven by capital raises and slightly higher leverage, indicating strong demand in the sector [31][38]. - The report highlights a trend of increasing "servicing-released" loans, where the servicing is sold at issuance, and emphasizes the importance of selecting loans serviced by known slower servicers for better protection [2][11][21]. Summary by Sections Agency MBS Overview - Mortgages tightened this week, with rates falling by around 20 basis points due to dovish signals from the FOMC and weak economic data [2][4]. - The BoJ's recent actions have not yet made MBS attractive to long-term investors, but a steepening of the US curve could provide support [2][7]. Market Dynamics - The shift in the loan seller landscape has increased the share of retail loans sold as servicing-released, which complicates the analysis of TPO share [11][21]. - Money manager inflows have been robust, with a notable shift back to index funds from active managers [7][8]. mREIT Activity - The top six mREITs added close to $7 billion in Agency MBS in Q2, with AGNC leading the way by adding $3 billion [31][32]. - mREITs are currently holding a significant portion of their Agency MBS in higher coupon categories, which allows them to meet dividend targets but also exposes them to convexity risk [31][35]. Rate Projections - The report discusses expectations for primary rates, projecting a modest decline of 20 to 60 basis points, depending on various market conditions [40][42]. - The analysis indicates that significant changes in the market would be required for primary rates to drop into more favorable levels for refinancing [40][42].