Pass-Throughs Benefit From Investor Uneasiness
May 05, 2011
Traders reported bearish sentiment continued to bring buyers into the mortgage market, sustaining prices. Mortgage-backeds generally perform relatively well when the Treasurys market is falling. In addition, traders said maneuvers such as moving up in coupon or from 30-year to 15-year pass-throughs were favored within the mortgage-backed sector as a means of cutting interest rate risk. Thanks to the buying, 30-year conventional pass-throughs lost 1/32 on Wednesday's close, outperforming the 2/32 loss seen by the 10-year Treasury. Government National Mortgage Association securities fell 3/32. 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. Two bid lists of adjustable-rate mortgages traded ``like a diamond,'' in the words of one trader. One of the bid lists, consisting of $100 million of ARMs indexed to the one-year constant maturity Treasury, was seen as particularly attractive because of its 11% or better lifetime caps and 10 years of seasoning, which should ensure stable prepayment speeds. The second bid list was for $45 million of assorted seasoned ARMs. In the 30-year pass-through sector, up-in-coupon trades were popular with players looking for a defense against a rise in interest rates. In up-in-coupon trading, traders sell pass-throughs with lower coupons for those with higher coupons: for example, swapping 7% coupon pass-throughs for those with 8% coupons.
