Agency MBS Weekly_ Defying Gravity

Summary of Key Points from the Conference Call Industry Overview - The conference call primarily discusses the Agency Mortgage-Backed Securities (MBS) market in North America, focusing on the implications of current interest rates and regulatory changes on mortgage demand and valuations. Core Insights and Arguments 1. Interest Rates and Mortgage Demand - Current interest rates are described as "defying gravity," with concerns that if they remain high, mortgage demand may decline significantly [1][5][19] - The 30-year mortgage rate is currently around 6.72%, which is significantly higher than the coupon on the mortgage index of 3.3%, indicating limited extension risk for MBS holders [17][18] 2. Valuation and Funding - Valuations for production MBS are considered compelling, with improved funding conditions noted [5][19] - The report highlights a $22 billion month-over-month decrease in total agency MBS gross issuance to $96 billion in December, with net issuance dropping to $20 billion [80][252] 3. Regulatory Environment - The resignation of Vice Chair for Supervision Michael Barr is expected to impact the regulatory landscape, potentially leading to favorable conditions for securitized products due to anticipated deregulation [174][258] - The report suggests that the likelihood of a capital-neutral endgame for Basel regulations is higher, which could benefit agency MBS and other securitized products [258] 4. GSE Reform and Market Sentiment - Ongoing discussions around GSE reform are likely to weigh on spreads until more clarity is provided [24][26] - Fitch Ratings indicated that if GSEs exit conservatorship while maintaining support, their ratings could align with the U.S. sovereign rating, which would be positive for MBS [24] 5. Overseas Investment Trends - Overseas investors net added $8.7 billion in agency asset-backed securities in October, despite a decrease in overall holdings due to valuation changes [142][145] - Japan and the UK were significant contributors to this net addition, while mainland China continued to reduce its holdings [143][145] Additional Important Insights 1. Prepayment Speeds - Prepayment speeds for 30-year conventionals slowed by 13% in December, while Ginnies slowed by 10% [250][251] - The slowdown in prepayment speeds is attributed to rising mortgage rates and seasonal factors [250] 2. Market Dynamics - The report notes that the market has traded well despite rising rates, with a recommendation to add long positions in specific MBS [243] - The lack of payup convexity is a concern, making it challenging to find cheap sources of convexity in the current market [246] 3. Speculative Monitor - The speculative monitor indicates that funding may be challenged until quantitative tightening (QT) ends, which could impact the performance of certain MBS [244][33] 4. Future Outlook - The outlook for MBS remains cautiously optimistic, with expectations of improved demand from banks and overseas investors as regulatory conditions evolve [75][76] 5. Analyst Recommendations - Analysts recommend long positions in specific MBS swaps (e.g., long 6/4.5 swap) to capture carry and spread, while being mindful of potential risks related to supply and hedging challenges [76][243] This summary encapsulates the key points discussed in the conference call, providing insights into the current state and future outlook of the Agency MBS market.