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Agency MBS Weekly Summary

Core Content

This document provides a detailed analysis of the current state and outlook for U.S. Agency MBS (Mortgage Backed Securities) as of June 13, 2025. It includes insights on coupon allocations, prepayment speeds, and market valuations across different geographic regions (NY, FL, TX) and coupon levels.

Main Points

• Recommendation: The report suggests a migration from New York (NY) to Florida (FL) due to better call and extension protection, despite NY's strong payups.
• Coupon Allocation Trends:
  • Large funds shifted from conventional to Ginnie in Q1, with conventional allocation declining by 0.6% and Ginnie rising by 0.5%.
  • Funds remained underweighted in deep discount coupons (1.5s-2.5s) and showed modest increases in allocations to FN 4.5s and FN 6.0s.
  • Allocation to FN 5.0s-5.5s decreased by 0.3% and 0.6%, respectively.
• Prepayment Speeds:
  • June speeds for conventional pools are expected to decrease by 2%, while G2SF will decrease by 6%.
  • July is projected to see a rise in speeds by 4-5%, and August is expected to decrease by 6-7%.
  • The YB model is slower than actuals for higher coupon NY pools but tracks FL better.
• Valuation and OAS (Option-Adjusted Spread):
  • NY pools are considered rich compared to same-coupon TBAs and FL/TX, with OAS 10-20bp tighter.
  • FL 6.5s are particularly compelling, with an OAS pickup of 17bp versus TBA.
  • TX is viewed as fairly priced.
• Market Conditions:
  • Treasury yields have remained in a tight range, with implied volatility trending lower, supporting mortgage spreads.
  • Bank demand has been concentrated in Treasuries, and while there is a slight expectation of an uptick in the second half, deposit growth has been lower than in 2024.
• Investor Sentiment:
  • Over 90% of investors expect bank demand in 2025 to be around $50-100bn.
  • The report remains neutral on the basis due to production coupon OAS sitting at 42bp, slightly wider than the fair value target of 25-35bp.

Key Information

• Prepayment Behavior:
  • NY provides the best call protection, while FL is the only region offering consistent extension protection.
  • FL's payups in production coupon have strengthened over the past year, now on par with $250k Max at ~30 ticks.
  • TX payups remain below 10 ticks, and discount coupon payups in NY have remained high at 20-30 ticks despite no extension protection.
• Loan Characteristics:
  • NY spec has lower FICO and LTV compared to TX and FL.
  • FL has a higher purchase share at 88% and higher DTI.
  • TX has the largest loan size, which affects convexity.
• Model vs Actual Speeds:
  • Model speeds are slower than actuals for higher coupon NY pools but more accurate for FL.
  • A 5% slowdown is applied to the model for NY specs to account for the discrepancy.
• Geographic Refi Frictions:
  • NY has a strong refi disincentive (75-280bp) and may use CEMA to bypass taxes.
  • FL has a 55bp refi disincentive with less prevalence of legal workarounds.
  • TX has specific cashout rules and fee limitations, affecting prepay behavior.
• Short WALA Speeds:
  • FL and TX show higher speeds in short WALA, driven by curtailments and paydowns from home sales.
  • NY remains consistently slow in short WALA speeds.

Coupon Stack Preference

• The report maintains a preference for 5.5s on the coupon stack due to their balanced performance across rate scenarios.
• 5.5s offer the best balance of total returns and curve-hedged performance.

Summary of Key Tables

• Table 5 and 6: Show valuation and total returns across different rate scenarios for the TBA coupon stack and excess returns versus 5-year Treasuries.
• Table 8: Highlights the shift in allocation from conventional to Ginnie and the performance of different coupons.
• Table 10: Compares refi frictions across NY, FL, and TX.
• Table 13 and 14: Provide loan size and characteristics for different vintage and geographic spec pools.
• Table 15 and 16: Compare ITM and OTM s-curves across different geographic pools, showing call and extension protection.
• Table 19: Compares actual vs projected 1-year speeds for different coupons.

Conclusion

The report concludes with a neutral stance on the basis for MBS, highlighting the importance of FL as a compelling investment due to its call and extension protection, while noting NY's rich valuation and FL's improved payups. The analysis suggests a cautious approach to market movements, emphasizing the need to monitor prepayment behavior and market demand dynamics.