Fixed Income Recap

Mortgages Continue Tightening
Mortgages rallied strong today, tightening to Treasuries. 15-year collateral outperformed the longer 30-year, while Treasuries were more unchanged on the day.

Mortgages were just slightly tighter before tightening further on news of discussions within Fannie and Freddie of waving new appraisals on refinances to assist homeowners with reducing their mortgage burden. This would allow homeowners who are underwater, and therefore currently unable to refinance, an opportunity to take advantage of today’s lower rate environment. No detail has been given on how lenders would handle the depreciated home values if a plan like this was implemented, but this would obviously be an obstacle.
Prepays on outstanding MBS will accelerate as a result of a plan like this. In an environment where rates are low and new issue is nonexistent, most MBS is priced at a premium. Given this potential risk, we will be very selective as we add new positions.