Agency MBS Weekly: A Sticky Summer

Research evidence excerpt

Agency MBS Weekly: A Sticky Summer

IdeaM

Market Recap

Rates bull steepened after the long weekend (ahead of another long weekend next week,

not that we're complaining) as PCE came in below Morgan Stanley expectations and oil

sold off as the Brent curve is now in contango. This ended up reducing some of the hikes

priced into the markets, though of course markets are still expecting a hike around the

October and December meetings. Our economists' outlook for inflation is more sanguine

than the average Fed participant and they think that the Fed will stay on hold this year,

but the data has to cooperate.

This left us with vol modestly lower, but the weakness in equities caused credit spreads to

widen 2bp and stocks to be down almost 2%. While broader risk assets struggled,

mortgages outperformed as expectations of Fed tightening were reduced. The index was

3bp tighter on the week as the stack tightened mostly in parallel. While we're not

surprised that mortgages tightened into lower expectations of Fed hiking, we're surprised

mortgages are doing as well as they are in the face of some possible challenges in the

longer term.

Exhibit 2: Current coupon conventional OAS was 5 bp tighter Exhibit 3: 2s-10s was unchanged while 1yr10yr was 1bp lower

(but just 2bp tighter vs. swaps, not shown but look at on the week

MSCCSOAS Index) nVol 2s-10s

curve

CC TOAS Fed buying Fed reinvesting No Fed buying 140 240

125 180

110 120

95 60 (bp)

20 TOAS 80 0

65 -60

-20

50 -120

-40 2016 2017 2018 2019 2020 2021 2022 2023 2024 2025 2026

2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018 2019 2020 2021 2022 2023 2024 2025

1yr10yr vol 2s-10s curve (RHS)

Source: Yield Book, Morgan Stanley Research Note: Since 2016, uses desk assumptions for deliverable,