1、North America Securitized Products Research26 November 20192020 Agency MBS OutlookNote: This piece is part of the US Fixed Income Markets 2020 Outlook, featuring our strategists views on the year ahead across asset classes.Table of Contents | PDFHeading into 2020, advocate a modest mortgage overweig

2、ht versus rates; supply will likely continue to a major headwind MBS next year, seasonally low supply should provide cover during the first half Note: This piece is part of the US Fixed Income Markets 2020 Outlook, featuring our strategists views on the year ahead across asset classes.Table of Conte

3、nts | PDFWe find broad correlation between seasonal variations and mortgage performanceBank sponsorship has been strong this year and expect the same in 2020. Investor positioning is close to neutral overall, a positive for thesectorSpecified pool trading volume and have soared this past year; stand

4、alone valuations are reasonable, but differential versus TBA have meaningfullynarrowedThe refi of 2019 took investors surprise; driving factors included a surfeit recently appraised cash-outs and purchase loans that had faced no significant rate incentive, appraisal waiver offerings from the GSEs, e

5、lectronic income and asset verification, and an expanded non-bank/broker/correspondent conventionalfootprintIf mortgage rates remain steady, anticipate that originators will be able to broaden their and the gap will narrow between worst-to-deliver and less strongly call protectedpoolsIn the event an

6、other rally, however, the 2019 vintage has plenty of extremely refinanceable collateral in lower coupons that be the focus broker activityand most of it lives in themajors/multi-lendersThe GSE recap and release plan should move forward next year, but dont expect dramatic short term action on the ori

7、ginationfootprintHow the CFPB decides to redefine (if at all) could have a meaningful impact on the GSE / Ginnie footprint; right now, simple elimination of the patch would drive supply to FHA and be a technical positive forconventionalshowever, the current proposal to change GSE pooling practices c

8、ould harm the conventional TBA market; responses are due on January21stSecuritized Products Research Brian Ye AC(1-212)834-3128 HYPERLINK mailto:brian.ye brian.ye NicholasMaciunas (1-212)834-5671 HYPERLINK mailto:nicholas.m.maciunas nicholas.m.maciunasAlex D.Kraus(1-212)834-5954 HYPERLINK mailto:ale

9、xander.d.kraus alexander.d.krausJ.P. Morgan Securities LLCSee page 21 for analyst certification and important disclosures. HYPERLINK / 2020 Agency MBS OutlookHeading into 2020, advocate a modest mortgage overweight versus rates; supply will likely continue to be a major headwind for MBS next year, b

10、ut seasonally low supply should provide cover during the first half of the year as TBA volumeebbsWe find broad correlation between seasonal supply variations and mortgageperformanceBank sponsorship has been strong this year and we expect the same in2020. Investor positioning is close to neutral over

11、all, a positive for thesectorSpecified pool trading volume and pay-ups have soared this past year; standalone valuations are reasonable, but spread differential versus TBA have meaningfullynarrowedThe refi wave of 2019 took investors by surprise; driving factors included a surfeit of recently apprai

12、sed cash-outs and purchase loans that had faced no significant rate incentive, appraisal waiver offerings from the GSEs, electronic income and asset verification, and an expanded non- bank/broker/correspondent conventionalfootprintIf mortgage rates remain steady, we anticipate that originators will

13、be able to broaden their focus and the gap will narrow between worst-to-deliver and the less strongly call protectedpoolsIn the event of another rally, however, the 2019 vintage has plenty of extremely refinanceable collateral in lower coupons that will be the focusof broker activityand most of it l

14、ives in themajors/multi-lendersThe GSE recap and release plan should slowly move forward next year, we dont expect dramatic short term action on the originationfootprintHow the CFPB decides to redefine QM (if at all) could have a meaningful impact on the GSE / Ginnie footprint; right now, simple eli

15、mination of the patch would drive supply to FHA and be a technical positive for conventionalshowever, the current proposal to change GSE pooling practices could harm the conventional TBA market; responses are due on January21stViewsWe recommend an overweight versus Treasuries heading into2020In 30-y

16、ears, overweight UMBS 3s; they have best duration hedgedcarryIn premium coupons, own low payup specpoolsBe neutral on 15s overall; they have less spread but better supplydynamicsOverweight G2/FN 4s; they have underperformed and carry ispositive2019 has been a challenging year for mortgage investors

17、to navigate. A nearly 150bp rally triggered refi 19 and speeds took the market by surprise. Though mortgages generated positive excess returns versus rates, investors were whipsawed three times. A calmer macro environment, still attractive valuations, and a moderation in forward TBA supply should pr

18、ovide positive tailwinds as we head into 2020.This year, mortgage spreads touched some of the widest levels seen in the post-crisis era. Some of that was driven by the gyrations in the current coupon yields due to a flat yield curve and tight coupon stack pricing. At this juncture, mortgage spreads

19、are roughly unchanged year to date, with Treasury OAS around 45bp and swap OAS over 50bp. In particular, the sector has underperformed corporates by a decent margin. Not including January, during which corporates tightened almost 30bp retracing the losses of late 2018, corporates still outperformed

20、mortgages by close to 15bp since February (Exhibit 1).Viewed from this perspective, valuations are relatively attractive versus corporates.Exhibit 1: Spreads whipsawed multiple times in 2019, but mortgages lagged credit on the yearExhibit 2: Mortgages appear fair versus Treasuries, undervalued versu

21、s swapsAS AS on the MBS Index (left) vs. IG corp. spread (JULI Index) to UST,MBS Index Tsy OAS (left) JULI corp Tsy spread (right)60555045403530Feb19May19Aug 19Nov Source: J.P. MorganrightLibor and Treasury OAS of the mortgage index2000-082000-08Private market Index TsyOASIndex Libor OAS2000-03GSE-d

22、ominatedBenchmark Avg. = 47bpCur. Tsy OAS= 45bp1651751651751601501551251501001457514050135251300-25-50Source: J.P. Morgana Supply continues to be the main headwind for the sector. On top of an estimated$225bn organic supply, Fed SOMA portfolio run-off has forced private sector investors to absorb an

23、 additional $230bn MBS in 2019. We see little relief next year (see more detailed discussions below). However, low supply seasonality should provide cover during the first half of the year as TBA volume ebbs.On the demand side, bank sponsorship should be robust again next year, absorbing about a thi

24、rd of the mortgage supply; this will be primarily driven by deposit growth and benign views on the Fed and rates. Similarly, overseas demand should hold up as well. US asset managers will hold the key to the supply/demand equation in 2020.We look for the sector to absorb $195bn of agency MBS. Some o

25、f it should be naturally occurring, as coupon reinvestments alone should amount to over $50bn. In addition, fixed income allocations could increase after strong equity returns in 2019. Please see our supply/demand forecast section below for details.Investor positions are somewhat split based on our

26、year end survey. We received over 70 responses with asset managers and insurance/pension funds comprising the vast majority of respondents. Investors appear to hold divergent views of mortgages with roughly 40% falling into both the underweight and overweight camps (Exhibit 3). Less than 10% of resp

27、ondents are neutral. These results are weighted by asset size. View on spreads are equally split and the vast majority of investors expect spreads to stay within +/-10bp of the current level (Exhibit 4). Overall, the investor base appears close to home on positioning as well as on the outlook for 20

28、20 performance. This is a positive for the sector in our view as asset managers arent over-extended in their mortgage allocations and should be able to increase mortgage weights should the sector come under pressure.Exhibit 3: Investor positions are evenly split between overweights and underweightsR

29、esponses from investor survey November 2019, dollar-weighted to the question: “Are you overweight, flat or underweight agency MBS currently?” 30%25%20%15%10%5%0%Exhibit 4: though the vast majority expect spreads to stay within 10bp of the current levelResponses from investor survey November 2019, do

30、llar-weighted to the question: “Where do you think MBS Index OAS will trade at the end of 2020 relative to today?”45%40%35%30%25%20%15%10%5%0%UWModestUWNeutralModestOWOWSource: J.P. MorganMore than widerSource: J.P. MorganUp to 10bp wider Up to 10bp tighter More than 10bptighterExhibit 5: We recomme

31、nd an overweight versus rates, but stay neutral versus creditSummarized view on MBS vs. rates and MBS vs. IG corporateMBS vs. RatesMBS vs. IG CorpCommentFavors CommentFavorsPerformance / TBAs flat on the y ear, Index modestlyMBS IG credit tightened 15bp since February ;MBSValuationoutperformed; TOAS

32、 still w ide at +40bpmortgages hav e been flatIGIG-Low er IG supply y oy ; MBS supply w ill remainhighHigh full y ear supply ; 200+bn SOMA run-off astructural headw ind; seaonally low supply in H1; high UST supply , favor spread products generallySupplySource: J.P. Morgana MBS performance and season

33、alitya 6 7 Exhibit 6: Pre-crisis, mortgages outperformed swaps in Q1 and Q2, helped by lower seasonal net supplyAverage quarterly (2000-2007) MBS excess returns in ticks vs. UST and swaps, daily delta hedged vs. quarterly adjusted net supply (paydowns are aligned w/ 1m lagged pool issuance)Exhibit 7

34、: Post-crisis, mortgages outperform Treasuries in the first half of the year, when net supply is lowAverage quarterly (2010-2018) MBS excess returns in ticks vs. UST and swaps, daily delta hedged vs. quarterly adjusted net supply (paydowns are aligned w/ 1m lagged pool issuance)2000-2007Q1Q2Q3Q4Tota

35、l2010-2018Q1Q2Q3Q4TotalNet Supply, adj ($bn)$49$51$59$67$ 227Net Supply, adj ($bn)$31$28$54$46$ 159Index vs. Swaps (ticks)5.53.0-Index vs. UST(ticks)9.116.9Index vs. UST (ticks)4.420.5Index vs. Swaps (ticks)3.45.6(1.7)4.912.2Source: J.P. MorganSource: J.P. MorganWe present two sets of time periods,

36、pre and post crisis. The broad correlation between net supply and performance is fairly clear. In both eras, Q1 and Q2 tend to have the lowest net supply, mainly thanks to lower purchase seasonals. Q3 and Q4 typically garner more net supply. In terms of performance, mortgages are stronger in the fir

37、st half of the year. Q3 tends to be the weakest quarter for MBS, Q4 tends to be mixed with particularly strong performances in the post-crisis years. Pre-crisis, the market metric was generally more swaps focused, while after the crisis, performance metrics have migrated to be more Treasury focused.

38、 On average, mortgages outperformed rates 3-5 ticks in Q1, followed by a similar amount in Q2, then flat to negative returns in Q3 with Q4 mixed. 2019 offered a similar profile with the index outperforming UST by 15 ticks in Q1, down 6 tick in Q2, down 4 ticks in Q3, and up 12 ticks midway through Q

39、4. External macro events obviously affect how mortgages do in each quarter, but broadly speaking, low seasonal supply tends to favor mortgages in the first half of each calendar year.Supply/demand outlook: the challenge continuesSo far this year, mortgage supply has largely played out as the market

40、expected. The mortgage market is on pace to grow roughly $225bn by year end. Fed SOMA portfolio run-off is on pace to have shed $230bn this year. For 2020, we look for modest growth in organic supply, due to higher prices (and loan limits) and healthy levels of cash-out and home sales, both new and

41、existing. Run-off from the Fed portfolio may ease somewhat depending on the level of rates. Notwithstanding rate levels, the portfolio run-off is capped at $240bn each year. Overall, private sector investors will be asked to absorb around $450bn of agency mortgages in 2020, a similar amount to the p

42、ast two years.Exhibit 8: The supply/demand picture for this year and next$bn of supply and demand from various market participantsGSEs, 0Fed, 220GSEs, 0Fed, 220Banks, 150Fed, 230Banks, $175MM/ Other, $135MM/ Other, $195Net Iss, 225Net Iss, 250Foreign, $75Foreign, 75GSEs,REITs, $60REITs, 502019202020

43、192020SupplyDemand450400350300250200150100500Source: J.P. Morgan, Federal Reserve, Fannie Mae, Freddie Mac, TIC, SNL Financial, company filingsExhibit 9: Sources of supply ($bn)Supplier19 Est. Supplier19 Est. 20Est.DescriptionOrganic NetSupplyFederal Reserve Runoff225250Net issuance projections for

44、2019 were thrown into disarray after the 100bp+ rally in30yrrates. This is partly due to the timing mismatch between a refinanced mortgage paying down and getting reissued into a new pool. Overall net is on course to top $200bn as loan sizes trended higher with HPA, agency securitization rates remai

45、ned stable, and cash-out activity was robust. Given the overall expectation of a benign macro environment, next years issuance should mildly exceed this years total. The potential slowdown of speeds could add a little boost as the timing normalizes between paydowns and issuance. As always, securitiz

46、ation rate remains a potential wildcard, hinging on banks desire for loans.230220The rally pushed the Fed well above its runoff caps for most of 2019, and their MBS portfolio will be roughly $1,405bn at year end ($230bn smaller y/y). Given our view on rates for next year, the paydowns should hover r

47、ight near the $20bn cap, occasionally dipping below, leading to our projection that the shrinkage will be $20bn less than the maximum possible.Total Supply455470Source: J.P. Morgan, Federal ReserveExhibit 10: Sources of demand ($bn)Buyer19 Est. 20Est.DescriptionUS Banks175150Banks were insatiable bu

48、yers of mortgages in 2019. Deposit growth has fueled security buyinganddoesntlookpoisedtoslowdown.WellsFargomanagedtoadd$16bnofMBS while still under a balance sheet cap. Some of the buying from large banks this year could be attributed to the drop in reserves, but that isnt the full picture; they bo

49、ught plenty of bonds in the years before balance sheet normalization. The only development on LCR provided a small amount of relief to mid-sized banks but shouldnt have a material impact on their desire for MBS.Foreign investors7575Foreign demand has remained steadfast as MBS offer better hedged yie

50、ld than other formsofgovernmentguaranteeddebt.Almostallofthe2019overseasbuyinghascome from China and Japan; Taiwan has been less active than in yearspast.REITs6050REITs were able to buy in 2019 due to equity issuance in the first half even as the rally hurtmortgageperformance.Theheavypresenceofcallp

51、rotectedpoolsonREITbalance sheets helped insulate book value from the worsening TBA deliverable. With P/B ratios nearpar,equityraisesseemunlikelyinthenearterm,butcouldhappenlateronin2020.GSE retained portfolios100The GSEs might end 2019 slightly on the demand side of the equation. It is worth noting

52、 that Fannie is well below the asset cap and holds only $54bn in agency MBS while Freddie has stayed right near the boundary while holding over twice as much ($124bn). The forecast for 2020 is split into two cases; we think it is more probable that their portfolios stay roughly unchanged, but furthe

53、r action from FHFA related to the quote below from the Treasury white paper could see them shedding MBS. In light of this history,guarantorsshouldbeprohibitedfrommaintaininginvestmentportfoliosexcepttothe limited extent necessary to engage in the business of securitizing Government- guaranteed MBS.M

54、oney Managers / Other135 195 Our final category of buyers added less in mortgages this year than expected, as money managers seemed to pare back their mortgage overweight during 2019. Wide mortgage valuations could motivate these investors to add a substantial amount of MBS in 2020.Total Demand45547

55、0Source: J.P. Morgan, Fannie Mae, Freddie Mac, SNL Financial, TIC, company filingsOn the demand front, bank sponsorship has exceeded our expectations set at the start of the year. They are on pace to absorb $175bn of agency MBS. Generally, bank demand has been broad based but roughly half of that am

56、ount has come from the top five institutions. Among them, sponsorship has rotated from one to another. Wells Fargo, traditionally one of the largest sponsors of MBS, added $16bn agency MBS despite limits on its asset size. Should the restriction be lifted in 2020, it would be another tailwind for ba

57、nk sponsorship next year. The largest sponsor of mortgage demand thus far in 2019 (through Q3) is JPM. On the whole, even after growth this year, JPM still owns less MBS than either Wells or BoA, despite having a larger asset base. Though it is fruitless to guesstimate individual institutions invest

58、ment decisions, the rotation in leadership in 2019 shows that the banking sector as a whole continue to favor MBS.We use the Feds H.8 data to show broad trends in bank demand. Exhibit 11 tabulates year over year changes (as of each November to normalize time spans) in bank MBS holdings, mortgage and

59、 C&I loan holdings, and deposits. H.8 filings include market to market gains, thus the rally this year has helped boost the value of securities in bank portfolios. Adjusted for marked to market gains, yoy changes are about consistent with quarterly bank filings which strip out pricing effects.Exhibi

60、t 11: The Fed stopped rate hikes in 2019, and bank demand for securities, particularly MBS, picked upYearly change in various categories of bank assets & liabilities, using the Feds H.8, where AFS holdings include mark to market price movesY/Y ChangeAll SecuritiesAgency MBSReal EstateLoansC&I LoansD