Barclays Turns Bearish on Agency MBS

Agency MBS had a good run before the recent announcement from the FOMC meeting that the Federal Reserve will be reinvesting maturity and prepayment paydowns from MBS/Agency Debt to Treasuries.  Despite the fact that nominal spreads widening from historical lows of 62 basis points to current spread over the 10-Year of 84 basis points, the Agency MBS sector appears to have limited upside given less sponsorship, astronomical high dollar prices, and potential risks of added supply.  Barclays Capital in their latest "Securitized Products Weekly, August 13, 2010" continue their bearish stance on the sector.

"We remain underweight on the mortgage basis. On the valuation front, mortgages have performed very well over the past few months. With prices on higher coupons near all-time highs and perceived government induced refinancing risk, it is hard to see further upside. On the supply front, with the 10y Treasury rate reaching 2.73%, the threat of supply picking up through refinancing appears all too real. We expect Fed pay-downs to run at $250-300bn over the year, and demand should be hard-pressed to keep pace. And finally, with the Fed signaling its intention to reinvest its pay-downs into Treasuries, it creates strong support for mortgages to widen relative to Treasuries."