Portfolio Managers Report: What's the Deal with Seasoned MBS? 06/12/24

Wednesday, June 12, 2024
MANAGING DIRECTOR: Scott Carrithers PORTFOLIO SALES AND SERVICE: Chris Thompson • Sean Doherty • Kevin Doyle • Mark Tranckino Natalie Regan • Aaron Stoffer • David Farris • Lonnie Harris • Brian Schaff • Jeff Macy Josh Kiefer • Tom Toburen • Todd Czinege

US Treasury Market
Date	1 mo	3 mo	6 mo	1 yr	2 yr	3 yr	5 yr	7 yr	10 yr	20 yr	30 yr
06/05/24	5.37	5.41	5.35	5.10	4.72	4.50	4.30	4.28	4.28	4.51	4.43
06/06/24	5.35	5.40	5.34	5.09	4.73	4.51	4.30	4.29	4.29	4.52	4.44
06/07/24	5.35	5.40	5.38	5.18	4.89	4.67	4.46	4.45	4.43	4.65	4.56
06/10/24	5.36	5.39	5.38	5.18	4.88	4.67	4.48	4.47	4.47	4.69	4.60
06/11/24	5.35	5.37	5.37	5.16	4.84	4.60	4.42	4.41	4.41	4.63	4.54

The data in the table above is static as of the time it was pulled, so rates may have changed. Treat all data in this table and PMR as indications only and availability is
always subject to change. This information was pulled manually from sources we believe to be reliable. New source, as of 12/12/2022, Bloomberg, L.L.P. As of: close of business 6/11/2024.

What’s the Deal with Seasoned MBS?

Seasoned Mortgage-Backed Pools have a couple characteristics we really like. Depending on the coupon and structure, the burnt out collateral tends to create more predictable and stable prepayment assumptions. These pools have lower convexity risk, and are therefore easier to determine what the total return might be. However, it’s important to look at the model assumptions when evaluating a seasoned pool. Because a seasoned pool has established payment history, we can look at the past behavior and compare to future projections:

As you can see in the tables above, these seasoned 15-year pools are paying slower, evidenced by tighter spreads, than the model assumes they will going forward. The yield on these pools is largely determined by how quickly the deep discount will be accreted, meaning potential slower speeds will have a twofold negative impact on the portfolio- lower yield coupled with longer extension.

Despite the positive features of seasoned pools, we believe there are better options from a relative value standpoint at the moment. Right now, we are near absolute tightness in spreads for short fixed rate pools. This means you can pick up more spread with a Fannie Mae Delegated Underwriting and Servicing (DUS) bond, which typically trade tighter than pools. DUS bonds have a few advantages as well, including a hard final maturity date with no extension risk. The bond below (Bloomberg, LP) picks up spread over the seasoned pools from the previous example while having the same predictable nature of cash flows with a very similar 3-4 year average life.

Source: Bloomber L.P.

This information is intended for institutional investors only. The material provided in this document/presentation is for informational purposes only and is intended solely for private use. Past performance is not indicative of future results. This material is not intended as an offer or solicitation for the purchase or sale of any financial instruments.

•Not FDIC Insured •No Bank Guarantee •May Lose Value