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Agency MBS hit bumps due to Fed tapering

May witnessed heightened volatility, scattered demand and an overall move to higher yields and lower prices amidst a backdrop of Federal Reserve tapering uncertainties, analysts claim.

Gross new agency mortgage-backed securities issuance for the month of May came in at $155.5 billion, marking a small drop from $158.5 billion in April, but generally in line with the past several months, according to the Royal Bank of Scotland’s latest report.

“Although specified pools as a whole continued to increase their share of the agency MBS market, production has varied by issuer and coupon,” said Jeana Curro and Ashley Gam, agency MBS strategists for RBS (RBS)

They added, “In fact, many cohorts showed significant drops in issuance month over month.”

The origination trends remain the same here as in prior months with new loans either coming through the Home Affordable Refinance Program, or otherwise they generally reflect pristine credit.

Although competition in lending has picked up slightly, tight underwriting is expected to continue, RBS stated.

“As long as uncertainties regarding rep and warrant liabilities exist in the conventional lending market, we expect lending standards to remain very stringent,” analysts explained. 

The MBS market went from bad to worse over the month of May before eventually showing signs of stabilization in June. 

Overall, higher rates, increased volatility and a palpable growing concern over the central bank tapering its bond-buying program all pushed prices lower and spreads wider. 

Most impactful were the  comments of Ben Bernanke, chairman of the Federal Reserve, during his testimony to the Joint Economic Committee.

While his prepared testimony was accommodative and stressed that a premature tightening would slow economic recovery, it was his response during the question-and-answer session that sent the market on a bearish tear.

The chairman pointed out that the Fed could step down asset purchases in the next few meetings.

Similarly, Capital Economics expects gross domestic product growth to slow to around 1.8% in the second quarter of this year due to government uncertainty, but a pick up will happen in the second half of 2013.

“The slowdown is probably a delayed reaction to the tax hikes at the start of the year and more recently the sequestration cuts to Federal spending. But this fiscal contraction should begin to ease in the second half of this year, leading to a pick-up in growth,” analysts for Capital Economics concluded. 

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