adminCautious optimism was the prevailing sentiment at the ABS East event held on Monday, regarding the US Mortgage-Backed Securities (MBS) market, despite macroeconomic pressures. The market, second only to US Treasuries in size, has been facing challenges due to rising interest rates and the US Federal Reserve’s withdrawal from the market.
The rising interest rates have led to reduced bond prices and a contraction in supply-demand dynamics. This environment has resulted in decreased interest from bank treasuries, leading to a further reduction in demand. Despite these challenges, strategists from Bank of America unanimously agreed on the relative cheapness of MBS.
DoubleLine suggested that banks could potentially re-enter the market if they stop losing deposits or anticipate Federal Reserve rate cuts. However, supply is expected to remain tight as homeowners resist near 8% mortgage rates. This resistance has led to a significant reduction in new MBS issuance.
Baird predicted a record low net MBS issuance of $238bn this year due to these factors. The affordability gap in the housing market is at its widest ever, indicating a need for either a 33% drop in home prices or a return of mortgage rates to 3.5% to restore equilibrium.
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