Data & Analytics Insights

US MBS historic rebound from prior months depths

Albert Durso

Albert Durso

Senior Strategist, RMBS, CMBS
  • Rates Rally Fuels Outperformance
  • Discounted Coupons Ride the Wave
  • GNMA II 7% Squeeze Exposed

And Back From The Ashes....

From the ashes rises the Phoenix, our new name this month for the MBS complex. Wides became too inviting to ignore, and given the right macro backdrop, spread product exceled. Such was the case with salacious MBS spreads and a Fed squarely in the rear-view mirror.   

MBS Supply has not been an intrusion to performance the past year or so, and even forced selling has receded with no bank or investor implosions on the horizon as central bank rates maneuvers ebbed. With prepayments contained as well, the setting was conducive to tightening, as both domestic accounts and foreign concerns fueled the outperformance. 

MBS index performance for November was a sparkling +537 basis points in Total Return (MTD), with excess returns to duration neutral Treasury index +152 bps-the best since November 2022’s record Prices were over +4 points higher, outpacing Treasuries by nearly two points. The 10yr yield fell -60 basis points off the lofty levels from September and October, fully retreating inside 4.40%. 3m10y Vols (normalized) dropped 16 basis points to +112 as event risk dissipated. Lastly, the 2s10s curve flattened 19 basis points into the rally, net -36 basis points overall. 

Index Market Value (USD) Par Value (USD) Yield to Maturity (Market Value Wt) Eff Duration Opt Adj Sprd Total Return (USD) MTD Return Spread Advantage
USBIG 25,034.63 28,196.32 5.08 6.06 45.21 -0.32 4.6 0.9
MTG Index 6,570.93 7,603.70 5.3 5.81 50.86 -0.29 5.37 1.52
USBIG Corp 6,432.72 7,090.54 5.64 6.9 108.78 -0.27 5.95 1.83
USBIG ABS 47.77 49.17 5.37 2 57.81 -0.03 1.41 0.21
USBIG Treasury 10,559.25 11,898.46 4.58 5.84 -0.73 -0.4 3.44 -0.01
  Begin date End Date #Issues YTM Chg avg  prc prc chg OAS Chg Eff CVX Coupon
MTGINDX 10/31/2023 11/30/2023 257 -0.69 86.17 4.09 -14.5 -0.10 3.02
TSYINDEX 10/31/2023 11/30/2023 275 -0.46 88.28 2.77 -0.1 0.71 2.43

Originator supply dropped to $1.8 billion per session, its lowest since January as the housing season shuts down into the winter and only the largest of rates moves can shake out supply. Speaking of supply, 7.5s (net coupon) have regularly surfaced in daily TBA hedges, given the higher perch on retail offering levels. 7.5%s are now almost 4% of the pipeline that is still supported by 6.5%s and 7%s at 79%. The 30yr FHLMC primary rate took as sharp drop to 7.22%, while Bankrate’s daily quote plunged 45 basis points to 7.57% after opening the month above 8%.  

Hedge funds and Money Managers took a more constructive bias toward current and higher coupons this month, feasting on higher coupons and ample spreads to outgun any selling. Lower coupons remain at the mercy of rates, rallies benefit this fully extended PO (Principal Only) like sector while sell offs treat it like the long-ended step cousin its morphed into being.  

Market Perspective- GNMA II 7% Roll Shows the Squeeze is Worth the Juice 

Class C (GNMA) dollar roll trading has mostly been a sluggish market, with stagnant prepay speeds and ample supply calming the waters. This past month of November proved to be different for Class C settlement.   

From the start of the month, the bid on the roll popped to double digits (10/32nds) as higher yields sparked Asian demand for their beloved AAA rated, direct U.S. obligation GNMA (II) sector. Historically, Japanese buyers are very picky in terms of awaiting a so-called “bogey” or preferred entry level on MBS. The yield must be high enough for them to buy and hold, which is understandable, as no one wants to get extended out (duration) unless the return offers adequate compensation.

Added to the mix is CMO shelf accumulators, whose previous monthly collateral needs were focused lower in coupon, again with no ill effects to the market via their consumption.

However, in the case of GNMA II 7%s, where supply is 1/3 of lower deal coupons, the effects were both immediate and revealing.

Each month GNMA issues one MA pool for each 50-basis point net coupon, that serves as good delivery for that TBA. This multi-issuer pool is a veritable all-encompassing hodgepodge of issuers, both good and bad. The remaining pools are not good delivery specified/Custom pools (unlike UMBS). This reduces the float for Class C (GNMA) settlement.

September’s GNMA II 7% MA pool was MA9174 ($1.4B), October’s GNMA II 7%s MA pool was MA9244 ($1.8 billion). The November MA pool (MA9308) was $2.933 billion, larger than the prior months, as lending levels rose sufficiently to populate a net 7% coupon. Demand, as noted, was greatly increased.

Using a 9 CPR (October aggregate) on GNMA II 7%s, break-even (“carry”) was 2 7/8ths 32nds, implying a 3.64% funding rate-very special when compared to LIBOR and SOFR levels of 5.4%. 

MBS Pool Number MBS Issue Date SUM Original Loan Amt SUM Pool Iss. RPB AVG Original Loan Amt AVG Current Loan Age Current AVG Original Loan Amt m1CPR1 m2CPR1
MA9174M 09/01/2023 1,473,865,000.00 1,47,358,000.00 327,816.95 1.5  327,771.59 0.89 1.27
MA9244M 10/01/2023 1,820,207,000.00 1,819,621,000.00 336,017.54 0.3  336,022.72 1.81  
MA9308M 11/01/2023 2,932,915,000.00 2,932,188,000.00 342,030.90 0.2 342,030.90    


As interest rates move higher, there is always the danger supply being limited as loan underwriting lags into the uptick-borrowers naturally balk at increased borrowing costs. Added to that, is the seasonality of the housing slowing into winter months, even fewer loans written.

Alternately, bond demand increases as yields surges, however this time of year that is offset into year-end as investors close their books in the United States. For Asia, that year end occurrence is set for March 31-lots to consider from an investor perspective. That’s when the basics of dollar roll funding come to the forefront, as rolls trade special and funding favors the pool holder. 

Month to date:

A solid turnaround for the discount laden MBS complex with rates rallies and price gains benefitting the index massively. Buyers swooped in at the wides, firming spreads 22 to 26 basis points as the current coupon fell.

The 30yr current coupon (30yr CC) lowered 78.5 basis points (5.87%), OAS and ZV firmed 22 to 26 basis point to 36.14 and 134.6 respectively. The highly followed benchmarking to 5&10yr Treasury comparison tightened 26bps to +154.7-a level not seen since the summer.    

30yr Current Coupon - November 2023

The 30yr-current-coupon (30yr CC) lowered 78.5 basis points (5.87%), OAS and ZV firmed 22 to 26 basis point to 36.14 and 134.6 respectively.

Source: Yield Book/LSEG, as at December 1, 2023. Past performance is no guarantee of future results. Please see the end for important legal disclosures.

Year to date: 

A grinding rally from the end of October to month end-which usually portends widening from here. Countering that assumption is year-end slowdown in trading flows, so that we may hold into 2024.

The Current Coupon for 2023 has risen 53 basis points (net of rallies and sell offs). This encompasses volatile events in both directions, banks failures and Fed rate hikes-quite a year.

The other parameters show OAS 26 bps wider, while ZV and Tsy spreads were one to 11 bps wider, firming from the abyss as we approach the countdown to year end.     

30yr Current Coupon-YTD 2023

The Current Coupon for 2023 has risen 53 basis points (net of rallies and sell offs). This encompasses volatile events in both direction, banks failures and Fed rate hikes-quite a year.

Source: Yield Book/LSEG, December 01, 2023. Past performance is no guarantee of future results. Please see the end for important legal disclosures.

Stay updated

Subscribe to an email recap from:

Legal Disclaimer

Republication or redistribution of LSE Group content is prohibited without our prior written consent. 

The content of this publication is for informational purposes only and has no legal effect, does not form part of any contract, does not, and does not seek to constitute advice of any nature and no reliance should be placed upon statements contained herein. Whilst reasonable efforts have been taken to ensure that the contents of this publication are accurate and reliable, LSE Group does not guarantee that this document is free from errors or omissions; therefore, you may not rely upon the content of this document under any circumstances and you should seek your own independent legal, investment, tax and other advice. Neither We nor our affiliates shall be liable for any errors, inaccuracies or delays in the publication or any other content, or for any actions taken by you in reliance thereon.

Copyright © 2023 London Stock Exchange Group. All rights reserved.