Wall Street Tells Mortgage Buyers Wider Spreads Are a Point of Entry

(Bloomberg) -- Analyst teams at Morgan Stanley and J.P. Morgan have raised their recommendations on the agency MBS sector following the recent widening of mortgage spreads.

Over the past week, Morgan Stanley advised investors to “go long” the sector and cited a wider 30-year Fannie Mae current coupon Treasury option-adjusted spread as a positive. JPMorgan moved to a neutral from an underweight recommendation due in part to the wider spread offered by the Fannie Mae 30-year current coupon to a blend of 5- and 10-year Treasuries.

The Fannie Mae current coupon spread over a blend of Treasury 5- and 10-year notes, a popular valuation method for mortgage investors, has widened 12 basis points to 85 since March 26, when it closed at its tightest level since January 31, 2018, according to data compiled by Bloomberg. Its average level last year was 82 basis points.

The agency MBS sector still faces some near-term headwinds, however. After a tepid first quarter of just $80 billion in supply from both organic sources and roll off from the Fed’s balance sheet, Robert W. Baird expects volume to pickup over the next three quarters to $102, $143 and $119 billion, respectively. We may also see higher prepayment speeds over the next few reports due to the rate rally earlier this year.

In addition, the joint Fannie Mae-Freddie Mac security, Uniform MBS, is set to roll out on June 3 and may cause a rise in volatility.

To contact the reporter on this story: Christopher Maloney in New York at cmaloney16@bloomberg.net

To contact the editors responsible for this story: Christopher DeReza at cdereza1@bloomberg.net, Allan Lopez, Adam Cataldo

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