As the Ginnie Mae HMBS market enters its fifth year and crosses over $30 billion of pool issuance, fixed-rate HMBS performance into early December has been impressive. With rates range-bound but drifting wider into the month, fixed-rate spreads have tightened in an exaggerated fashion on the magnitude of 25 basis points. This feels eerily similar to late 2009 when we saw a dramatic tightening in spreads, before the onset of the Greece crisis in late spring 2010.
Heading into 2012, spreads and sponsorship for pools and strips will largely depend on domestic and foreign macro events along with rate levels, and generally dictate where we’re headed. Aside from HMBS being cheap on a relative value basis versus other government-guaranteed MBS and CMBS, we’ve also seen the fixed-rate HREMIC stripped pass-through bid come back after a lengthy hiatus. Par floaters have continued to meander wider to the high 50s/low 60s DM and have underperformed fixed rates. The IO bid has remained strong and multiples have been generally correlated to macro market events and movements in competing asset classes across agency and non-agency MBS. Domestic banks, REITs, money managers and hedge funds have dominated flows, and this is expected to continue in 2012.
I expect market volatility to persist, fueled by multiple factors. Domestic growth will remain challenged as Europe will likely enter recession, and expect the Fed to remain on hold until late 2013 or early 2014. Additionally, I expect an announcement on QE3 in the second or third quarter and continued policy uncertainty and gridlock in Washington leading up to the election. That being said, I expect agency MBS to perform well in 2012 due to technical/structural factors, with GNMA paper outperforming conventionals. The Full Faith and Credit guarantee for overseas investors and the zero percent risk weighting for domestic banks will fuel demand.
Prepayment speeds for the HMBS universe have remained slow and stable. The 2009 fixed-rate vintage has been running roughly 50 percent of the PPC curve, with 2010 fixed rates running roughly 40 percent and the 2011 vintage 65 percent. The story of this asset class exhibiting low negative convexity with superior call protection has held true after several years of performance. Floaters have paid faster in 2011, but the 2009 and 2010 vintages are coming in roughly 53 percent and 86 percent of PPC, respectively.
There is no shortage of things to look forward to in 2012. Better and more standardized data reported by servicers and maintained by Ginnie Mae, Intex and Bloomberg is critical. Yieldbook should release its first version of an OAS model, which will help liquidity and bring in new accounts. On the heels of a major shift in the competitive landscape in 2011, midsize platforms will take the reins and be rolling out financial assessment guidelines to mitigate taxes and insurance default risk. There also are discussions that HUD may announce additional guidance at some point in 2012. How this will affect volume remains to be seen. Consistent dealer support of the sector with research coverage and analytics support to assist with end account confidence will also be helpful.