The surge in oil prices that started last Friday and followed through on Monday and Tuesday this week made analysts at Bank of America/Merrill Lynch think there was a good chance the past two months’ relentless move lower in treasury yields, and flattening of the yield curve, would reverse.
This led the ABS team to a reversal of their view, seeing a bear steepening of treasuries as more likely, and a somewhat dramatic move from an underweight to overweight view of agency MBS this past Tuesday.
“After the remarkably strong January employment report (the highest 3-month payroll gain since 1997), as well as a benign January prepayment report, we now think that bear steepening has more to go and that Refi 2015 may prove to be a dud,” says Chris Flanagan, ABS/MBS strategist at BAML, in a note to clients. “We maintain our overweight view of agency MBS and would look to take advantage of recent cheapening of IOs, with a coupon preference in 4s through 5s for both.”
With the risk of a near term, risk-off, deflationary market scenario now considerably lower in view, Flanagan sees lower downside potential for securitized products credit.
“Meanwhile, the strong employment report should be viewed as an unambiguous positive for household, commercial and corporate debt servicing capacity,” he says. “We reiterate our down-in-credit recommendations within non-agency MBS (option ARM mezz, 2014 CRT), CMBS (2013-1H2014 BBB-), CLOs (jr. mezz BBB/BB 3.0), and consumer ABS (AAA consumer loans).”