VABS - Agency MBS: The Overhang That Wasn't
2023-07-14 01:15:00 ET
Summary
- After failures at SVB and Signature, markets have successfully absorbed vast sales of the banks’ MBS portfolios.
- Coming into 2023, the agency mortgage-backed securities market seemed likely to benefit from both higher mortgage rates and the impact of sizable refinancings in 2020-21.
- This has largely played out as expected, with a modest $93 billion in net origination through midyear compared to annual average of $650 billion over the past three years.
By Jason W. Smith
After failures at SVB and Signature, markets have successfully absorbed vast sales of the banks’ MBS portfolios.
Coming into 2023, the agency mortgage-backed securities market seemed likely to benefit from both higher mortgage rates and the impact of sizable refinancings in 2020-21, leading to lower forecasts for new origination supply this year.
This has largely played out as expected, with a modest $93 billion in net origination through midyear compared to annual average of $650 billion over the past three years.
Given that money managers and other relative value investors were expected to be the source of marginal demand in 2023, supply levels should have been very digestible.
However, the market endured a unique shock in April, when it was announced that some $83 billion in MBS seized by the FDIC from SVB and Signature Bank ( SBNY ) were to be sold back into the market in a “gradual and orderly” manner.
The bonds typically would have stayed on bank balance sheets but were being reintroduced into available float. The announcement greatly widen spreads for Agency MBS given the uncertainty created by the size and speed of the planned liquidation.
Interestingly, the makeup of the bonds is quite different than that of current higher coupon MBS otherwise being issued into the markets. These were low-coupon securities originated in 2020–21 that at the time were largely purchased for bank and Federal Reserve balance sheets. More significantly for investors, the bonds, which had originated at prices north of par, came to trade at a 15 to 20% discount to par.
After some initial uncertainty, however, the market has quickly turned the recent liquidation event into an opportunity. Two-and-a-half months into the selling program, the FDIC has already shed about 68% of the two banks’ pass-through securities and 50% of their collateralized mortgage obligations.
Meanwhile, markets have already bid up spreads by about 15 basis points. Given the healthy demand and orderly market absorption, the selling program is expected to finish well ahead of most initial expectations.
Looking back to the start of the year, one of the opportunities we saw in the Agency MBS landscape was the potential to invest at a discount - a rare occurrence for a market that historically has traded at prices of $103 and above. We were not expecting the degree of the recent opportunity, but so far the FDIC has cooperated nicely with our views.
This material is provided for informational purposes only and nothing herein constitutes investment, legal, accounting or tax advice. This material is general in nature and is not directed to any category of investors and should not be regarded as individualized, a recommendation, investment advice or a suggestion to engage in or refrain from any investment-related course of action. Investment decisions and the appropriateness of this material should be made based on an investor's individual objectives and circumstances and in consultation with his or her advisors. Information is obtained from sources deemed reliable, but there is no representation or warranty as to its accuracy, completeness or reliability. All information is current as of the date of this material and is subject to change without notice. The firm, its employees and advisory accounts may hold positions of any companies discussed. Any views or opinions expressed may not reflect those of the firm as a whole. Neuberger Berman products and services may not be available in all jurisdictions or to all client types. This material may include estimates, outlooks, projections and other “forward-looking statements.” Due to a variety of factors, actual events or market behavior may differ significantly from any views expressed.
Investing entails risks, including possible loss of principal. Investments in hedge funds and private equity are speculative and involve a higher degree of risk than more traditional investments. Investments in hedge funds and private equity are intended for sophisticated investors only. Indexes are unmanaged and are not available for direct investment. Past performance is no guarantee of future results.
This material is being issued on a limited basis through various global subsidiaries and affiliates of Neuberger Berman Group LLC. Please visit www.nb.com/disclosure-global-communications for the specific entities and jurisdictional limitations and restrictions.
The “Neuberger Berman” name and logo are registered service marks of Neuberger Berman Group LLC.
© 2009-2023 Neuberger Berman Group LLC. All rights reserved.
Editor's Note: The summary bullets for this article were chosen by Seeking Alpha editors.
For further details see:
Agency MBS: The Overhang That Wasn't