Bloomberg: Morgan Stanley and JPMorgan improve views of mortgage bonds as spreads widen


Morgan Stanley is telling investors to “go long” on mortgage bonds and JPMorgan has raised its view of agency MBS, according to an article Tuesday by Bloomberg News.

Morgan Stanley cited a wider spread between the 30-year Fannie Mae current coupon and the Treasury option-adjusted spread as a reason to recommend agency bonds, Bloomberg reporter Christopher Maloney wrote. JPMorgan, the investment bank arm of JPMorgan Chase, 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, he said.

“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,” Maloney wrote, citing data compiled by Bloomberg. “Its average level last year was 82 basis points.”

The story also contained some warnings, including a reminder that a new product, the joint Fannie Mae-Freddie Mac security known as Uniform MBS, will hit the market on June 3 and may cause volatility. There may also be an increase in prepayment speeds as lower mortgage rates prompt more homeowners to refinance.

“The agency MBS sector still faces some near-term headwinds,” Maloney wrote. “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 pick up over the next three quarters to $102, $143 and $119 billion, respectively.”

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