Halister News

(Bloomberg) -- Investors should move to neutral from previous overweight on MBS basis due to “increasing downside risks,” write BNP Paribas MBS strategists Sarah Hu and Philip Patterson in a research note.

• Basis “volatile in the short-term and likely to widen in the long-term”
• Ongoing theme of the year so far is increased supply
  • Rally in mortgage rates YTD has led MBS refi index to rise to ~2300 from 1100 YTD
  • 3.60% 30Y mortgage rate has 62% of the market refinanceable
• BNP economists have reduced forecast for Fed rate hikes through 2017 year-end to zero from seven
  • 10Y yield forecast to end year ~1.50%
• Increased concerns over U.S. growth could lead to further risk-off flows and mortgages could underperform
• Valuations appear “fair to rich”
• Basis widening may continue until investors price in eventual Fed tapering of MBS reinvestments