AD&Co. Market Analysis

By looking at the Market Analysis section of the Andrew Davidson & Co., Inc. website over the past month, one notices some interesting trends. The tables below sum up the Option Adjusted Spread (OAS) analysis for the weeks of 8/23/02 and 9/13/02.

The OAS on GNMA MBS has tightened considerably more than those on Conventionals in the past month as investors have sought the extra protection provided by an explicit government guarantee. Spreads have tightened on conventional MBS as well, but not to the extent that they have for Ginnies. For example, the OAS on GNMA 6.5's and 7.0's fell by 20% and 31.3% respectively compared to a decline of only 10.4% and 20.1% for the comparable FNMA coupons.

One also notices in the tables below that investors bid up 6.5's, 7.0's and 7.5 across all agencies. Spreads tightened markedly in this range, while remaining relatively constant for lower coupons. It appears that investors have bid up these moderate to high premiums as they reach for yield in hopes of moderating prepayments in these coupons. Spreads on 8s and especially 8.5s widened considerably as the market dried up for these super-premiums.

Table 1

Coupon	OAS 8/23/02	OAS 9/13/02	% Change
5.5	60.78	58.24	-4.2%
6.0	56.68	51.76	-8.7%
6.5	63.65	50.93	-20.0%
7.0	68.90	47.35	-31.3%
7.5	72.35	57.35	-20.7%
8.0	91.37	97.04	6.2%
8.5	113.21	132.60	17.1%

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