Mortgage Securities Traders Ponder Future of Favorite Swap Deal


(Bloomberg)—One of the best trades this year in the mortgage-backed securities sector may have further room to run.

Swaps linked to higher coupon Ginnie Mae II/Fannie Mae 30-year mortgages have rallied since February when the U.S. Department of Housing and Urban Development started cracking down on servicers whose loans to veterans were being refinanced at above-average speeds.

This slowed Ginnie Mae’s prepayment speeds, helping improve the performance of its securities compared with similar Fannie Mae MBS, and handing profits to traders who’d taken long positions on the swap.

For investors looking at recently-issued mortgages the question is, “do you think there is going to be faster ramping (of speeds) on the Ginnie Mae II 4.5s versus the Fannie 4.5s?” said Kevin Jackson, a managing director on Wells Fargo’s mortgage trading desk.

Mortgage rates will also have a big impact on the swap’s future performance, Wells Fargo’s Jackson said.

“Demand for the higher coupon Ginnies will remain pretty robust. The only caveat is if you get a rally in rates in which case prepayment speeds will pick up in higher coupons and cause the carry advantage to move lower. You could see some pull back in Ginnie Mae, but if we continue to drift higher in rates I think those headlines will stick.”

Bond yield forecasts call for the U.S. 10-year Treasury to end 2018 at 3.13 percent, about 26 basis points higher than its current level. That, combined with HUD’s crackdown, may continue to help drive the Ginnie Mae II/Fannie Mae 30-year 4.5 percent swap higher.

Others think all the profit may have already been squeezed out of the swap. Last week Citigroup’s MBS strategist team recommended taking profits in the position, noting that, “the swap has outperformed by roughly 12 ticks since the middle of April.”

Recently issued Ginnie Mae II 4.5 percents saw prepayment speeds of just 7.58 CPR in June, almost 2 CPR slower than comparable Fannie Mae 4.5 percents, according to data compiled by Bloomberg Constant Prepayment Rate (CPR): attempts to predict the percentage of principal that will prepay over the next 12 months based on historical principal paydowns. CPR is measured on 1 month, 3 month, 6 month, 12 month, or since issue basis This speed differential is the largest in favor of newly issued Ginnie Mae II 4.5 percent coupon since at least the end of 2014; the average differential over that period shows Ginnie Mae paying down 9.28 CPR faster than Fannie Mae.

To contact the reporter on this story: Christopher Maloney in New York at [email protected] To contact the editors responsible for this story: Christopher DeReza at [email protected] Adam Cataldo, Allan Lopez


© 2018 Bloomberg L.P

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