Wells Fargo Securities is getting into the 2018 outlook business early this year. Normally, most financial analysts wait until December, but not Wells Fargo.
Today structured finance analysts at the bank released this outlook report for private and agency mortgage backed securities. The entire outlook can also be downloaded by following that link.
As with 2017, the analysts see central bankers continuing to dominate mortgage bonds for another year.
One thing to keep an eye on is the reduction of the Fed’s balance sheet by $170 billion. However, they see enough investor interest to cover the sales.
“Driven by limited C&I growth and UST to MBS reallocation, bank demand could exceed $150 billion,” the analysts write. “Money managers may add a similar amount due to inflows and credit tightening. Overseas investors may add $100 billion, REITs $35 billion and GSEs about $25 billion.”
However, mix this with the elevated net issuance ($300bn) of the Fed into the MBS market and “there are potential headwinds during the second half,” they add.
“Elevated net issuance and Fed's balance sheet tapering creates a situation in which the private markets will need to absorb the highest level of supply in the MBS market in a given year since the crisis,” they said.
The analysts indicate that these predictions are based on key metrics of performance in the housing market. Should that market — e.g., new and existing home sales — improve or remain flat, the outlook will likely remain unchanged. All bets are off, the abstract indicates, if those markets stall in the New Year.
“Potential tax reform could damp turnover and cashout refi's but encourage rate-term refi's to some extent, but the effect is likely to be felt gradually over time,” they said.
Vipul Jain, Anish Lohokare and Randy Ahlgren are the authors of the report.