Agency MBS Market Commentary: Searching for a bid

Research evidence excerpt

Agency MBS Market Commentary: Searching for a bid

Barclays | Agency MBS Market Commentary

that had tightened them to this level is becoming more erratic. Without GSEs stepping back in,

the path of least resistance is likely wider as mortgages remain bidless from money managers

and banks. The overseas holdings increase in May was impressive, but we are not sure how

much was real money given most of it happened in the Cayman Islands. If the GSEs do come

back in, MBS could tighten temporarily, until their portfolios start to approach their caps either

later this year or in early 2027. With limited information available, MBS investors should remain

apathetic, taking down overweights but not getting too short. The macroeconomic

environment remains conducive to earning carry for now, informing our positioning within the

sector.

We would like to acknowledge the contributions of Anvay Vasant Wayal in the preparation of this

report.

Searching for a bid

Mortgages widened again this week (Figure 1). Realized CPI inflation came below consensus on

Tuesday, causing the market to price out almost half a hike in 2026. However, oil, a key driver of

inflation expectations since March, rose to $85/b of Brent from $76 last Friday, following

continued conflict escalation in Iran over the weekend. On the net, 10s were unchanged on the

week, with the curve steepening only slightly. Vols were also unchanged. After widening by

about 4-6 ticks early in the week, MBS recouped some of those losses since Tuesday. Going

forward, we expect this dynamic to continue, with Iran and the oil narrative driving inflation

expectations locally, but likely subject to powerful long-term deflationary forces from AI and

rising productivity.