Valuation Commentary

Is the MBS Market Expensive?

Investors looking for MBS opportunities quickly come to the conclusion that the market is “expensive” in general, as witnessed by a stream of negative Libor OAS levels reported by major brokers. This may look abnormal to some investors who expect the MBS market to offer additional return over simpler fixed-income instruments. In this short article, we show that the MBS market is where it should be, given historical levels, agency rates and apparent stability of interest rates. In our view, the market is a self-learning system that, in the absence of big events, “learns itself” and reduces compensation for bearing the prepay model risk. Read more...

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Model Performance Review

Model Performance

By Dan Szakallas

Prepayments in May increased for discounts and were flat for cusp coupons and premiums. The increases seen in FNMA 30-year 4.5’s, 5.0’s, 5.5’s were 5%, 8%, and 5%, respectively. GNMA 30-year 4.5’s, 5.0’s and 5.5’s increased by 13%, 15%, and 13%, respectively. FNMA 15s as well as the GNMA 15s showed similar trends. Read more...

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AD&Co. Update

Valuation is in Vogue

By Rob Landauer

Like fashion, the “right” way to value MBS and ABS is a matter of taste. While some prefer the look of the moment, others are more comfortable with the classic style. The same is true for the valuation dilemma—should you stick with the classic style or adopt the new approaches? Some of the questions to be decided are:

1. Should I use a lognormal or normal distribution of rates in my term structure model?
   

2. Should I use a one or two factor term structure model?
   

3. Should my prepayment model be fitted to actual speeds or be based on a risk neutral approach?
   

4. How many paths should I use when running OAS?
   

5. What factors should my prepayment model take into consideration?

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