Agency MBS Weekly_ Almost March Madness

Summary of Key Points from the Agency MBS Weekly Report Industry Overview - The report focuses on the Agency Mortgage-Backed Securities (MBS) market and related investment products, including AAA Collateralized Loan Obligations (CLOs) and Agency CMO floaters. Core Insights and Arguments 1. Market Performance and Trends - Mortgages have remained resilient amid recent market volatility, with production coupon OAS tightening to 30 basis points, aligning with the fair value target of 25 to 35 basis points [10][12][13]. - Large funds increased their MBS overweights by 0.3% to 12.5% in January, while underweights in Treasuries rose by 1.1% to 20.1% [3]. 2. Investment Preferences - Preference for 6.0% and 6.5% Agency floaters is reiterated due to their attractive pricing and excess returns across various rate scenarios [17][18][25]. - AAA CLOs have tightened to 117 basis points, nearing historic tights, while Agency CMO floaters are at historic wides, indicating a divergence in risk and return profiles [26][27][28]. 3. Issuance and Demand Projections - Projected net issuance for Agency MBS in 2025 is $225 billion, with gross issuance expected to reach$1.1 trillion [25]. - Demand is anticipated from banks ($100 billion), money managers ($150-200 billion), and foreign investors ($100 billion) [25]. 4. **Refinance and Prepayment Trends** - The Fannie Mae RALI Index reported a 0.5$44-47 billion of 10-year Treasury equivalents if rates move by 50 basis points [13][14]. Additional Important Insights 1. Comparative Analysis of Investment Products - Agency floaters are viewed as more attractive than AAA CLOs from a historical perspective, despite the latter's minimal credit risk [33]. - The discount margins on new issue Agency CMO floaters have widened since 2021, indicating a potential opportunity for investors [28]. 2. Market Sentiment and Expectations - A poll indicated that approximately 65% of investors expect tighter spreads over the next month, reflecting a bullish sentiment [10]. - The Fed Funds futures market anticipates two rate cuts by the end of 2025, suggesting a lower cap risk for floaters [47]. 3. Risks Associated with Floating Rate Investments - Agency CMO floaters face cap risk, which can affect their pricing and returns, while AAA CLOs are subject to call and prepayment risks [44][51]. 4. Performance Metrics - Performance was mixed, with belly coupons outperforming while wings underperformed, highlighting the need for careful selection within the coupon stack [18]. This summary encapsulates the critical insights and trends within the Agency MBS market as discussed in the report, providing a comprehensive overview for potential investors and stakeholders.