Pass-Throughs Perform Well, Lifted by a Wave of Purchases
May 04, 2011
Thirty-year pass-throughs were down 1/8, compared to a decline of 9/32 for the 10-year Treasury. Market participants added that conditions are favorable for mortgage-backeds to continue to do well -- even though they have now been outperforming the Treasury market just about every day for the last two weeks. The supply-demand picture is positive, market players explained: Investors are buying, but origination of new mortgage-backed securities by lenders remains low. In addition, collateralized mortgage obligation production continues apace, adding further demand. On Wednesday, two new CMO deals worth $300 million were announced, and one existing offering was increased from $150 million to $200 million. CMOs are mortgage-backed securities that have been sliced into parts to offer different yields and different levels of risk. Traders said more deals are under way using balloons as collateral. Estimates of the deals' sizes varied but started at $400 million. Balloon securities are securities that follow a string of small payments with a larger lump-sum payment at maturity to settle the debt; they are attractive to new home buyers who expect their incomes to increase, or to people who expect to sell off their property and pay off the loan in a shorter period than if they had borrowed with a conventional mortgage. Furthermore, volatility is low in the fixed-income markets, which helps mortgage-backeds because it reduces the cost of the options embedded in the securities. In addition, market players believe there is little chance of the U.S. Federal Reserve Board raising interest rates, at least for the next few months, and worries about a rise in prepayments have evaporated. Prepayments, which occur when homeowners sell, refinance, or make larger-than-scheduled mortgage payments, erode the value of mortgage-backed securities because they return principal early and reduce interest earnings. A pass-through is a security made up of a pool of debt instruments, with the income from the debt passed through an intermediary -- usually a government agency or investment bank -- to the investors.
VastPress 2011 Vastopolis
