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Nomura Effects Of Treasury's Plan To Sell $142B in MBS

Nomura Effects Of Treasury's Plan To Sell $142B in MBS

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Agency MBS: Special Topics
Securitized Products Research | Americas
 
Nomura Securities International Inc.
See Disclosure Appendix A1 for the Analyst Certification and Other Important Disclosures
 
21 MARCH 2011
FIXED INCOME RESEARCH
Treasury’s Unwinding of its $142bn MBS Portfolio:
 Return to a Neutral Stance on Agency MBS versusTreasuries
Contributing Research AnalystsAnkur Mehta Dhivya Krishna Ohmsatya Ravi
 
Today, the U.S. Department of the Treasury announced that it will begin the orderly wind down of its remainingportfolio of $142 billion in agency-guaranteed mortgage-backed securities (MBS). Starting this month, Treasuryplans to sell up to $10 billion in agency-guaranteed MBS per month, subject to market conditions.Here are our quick thoughts on the impact of this announcement on the agency MBS market:1) First, this announcement is clearly negative for the MBS basis - it should change the equilibrium level ofMBS spreads to widen by 5-8bp all else equal. As shown in Figure 1, supply/demand technicals arenegative for the MBS basis even in the scenarios of 30-year mortgage rates staying above 5.0%.Consequently, we recommend closing the long-term overweight on MBS basis we recommended onThursday (at a modest profit).2) The Treasury owns predominantly 30-year 4.5s (33%), 5.0s (32%), 5.5s (21%) and to a lesser extent 6.0s(8%). Higher coupons have done very well over the past few months and this announcement is likely to hurthigher coupons more than lower coupons.3) Most of the collateral owned by the Treasury is likely to command payups and we view this announcementas a modest negative for specified pool payups.4) The Treasury owns only FN/FH MBS and no GN MBS. This news should be a modest positive for GN/FNswaps.5) The Treasury also owns higher level of Freddie collateral (in proportion to the available float) and we viewthis announcement as a modest negative for Gold/FN swaps.
 
Nomura |Agency MBS: Special Topics March 21 2011
Figure 1: Updated Estimates of Supply/Demand Technicals for Agency MBS
Source: Nomura Securities International
30-year Mortgage Rate
4.50% 5.25%
Net Growth of Agency MBS Market
$0bn -$45bn
Likely net demand for agency MBS
Federal Reserve + Tsy -$380bn -$235bnDomestic banks $90bn $90bnOverseas investors $50bn $50bnGSEs -$100bn -$100bnServicers $25bn $0bnOthers (Domestic Money Managers) $100bn $100bn
Excess Supply of Agency MBS $215bn $50bn
 
Nomura |Agency MBS: Special Topics March 21, 2011
Disclosure Appendix A1
 
ANALYST CERTIFICATIONS
I, Ohmsatya Ravi, Ankur Mehta and Dhivya Krishna, hereby certify (1) that the views expressed in this report accurately reflect my personal views about any or all ofthe subject securities or issuers referred to in this report, (2) no part of my compensation was, is or will be directly or indirectly related to the specificrecommendations or views expressed in this report and (3) no part of my compensation is tied to any specific investment banking transactions performed by NomuraSecurities International, Inc., Nomura International plc or any other Nomura Group company.
Additional Disclosures required in the U.S
Principal Trading: Nomura Securities International, Inc and its affiliates will usually trade as principal in the fixed income securities (or in related derivatives)that are the subject of this research report. Analyst Interactions with other Nomura Securities International, Inc Personnel: The fixed income researchanalysts of Nomura Securities International, Inc and its affiliates regularly interact with sales and trading desk personnel in connection with obtainingliquidity and pricing information for their respective coverage universe.
VALUATION METHODOLOGY
Nomura’s fixed income credit strategists and analysts use relative value as their primary approach for forming the basis of b
uy, hold and sellrecommendations. This valuation methodology analyzes spread differences between an appropriate benchmark security or index and the security beingdiscussed. Relative value can compare different maturities within the same capital structure, different collateral/seniority structure within the same capitalstructure or a unique opportunity associated with a debt security. It is also common for a strategist/analyst to recommend an asset swap
a buy and sellrecommendation between two securities from the same issuer, tranche or sector based on the relative value of where the securities trade at a given pointin time.
A buy recommendation on an individual security reflects the analyst’s belief that the price/spread on the security will outpe
rform selected securities in thesame industry as the issuer (peers). Outperformance can be the result of, but not limited to, improving fundamentals, trading activity, a major rating agencyupgrade, or the acquisition by an issuer with a higher credit rating. Simila
rly, hold and sell recommendations represent the analyst’s belief that the security
in question will perform in-line or substantially worse than its peers.
Online availability of research and additional conflict-of-interest disclosures:
Nomura Japanese Equity Research is available electronically for clients in the US on NOMURA.COM, REUTERS, BLOOMBERG and THOMSON ONEANALYTICS. For clients in Europe, Japan and elsewhere in Asia it is available on NOMURA.COM, REUTERS and BLOOMBERG.Important disclosures may be accessed through the left hand side of the Nomura Disclosure web page http://www.nomura.com/research or requested fromNomura Securities International, Inc., on 1-877-865-5752. If you have any difficulties with the website, please email grpsupport@nomura.com for technical assistance.The analysts responsible for preparing this report have received compensation based upon various factors including the firm's total revenues, a portion ofwhich is generated by Investment Banking activities.
DISCLAIMERS
This publication contains material that has been prepared by the Nomura entity identified on the banner at the top or the bottom of page 1 herein and, ifapplicable, with the contributions of one or more Nomura entities whose employees and their respective affiliations are specified on page 1 herein orelsewhere identified in the publication. Affiliates and subsidiaries of Nomura Holdings, Inc. (collectively, the "Nomura Group"), include: Nomura SecuritiesCo., Ltd. ("NSC") Tokyo, Japan; Nomura International plc, United Kingdom; Nomura Securities International, Inc. ("NSI"), New York, NY; NomuraInternational (Hong Kong) Ltd., Hong Kong; Nomura Financial Investment (Korea) Co., Ltd., Korea; (Information on Nomura analysts registered with the
Korea Financial Investment Association (“KOFIA”) can be found on the KOFIA Intranet at 
http://dis.kofia.or.kr ); Nomura Singapore Ltd., Singapore(Registration number 197201440E, regulated by the Monetary Authority of Singapore); Nomura Securities Singapore Pte Ltd., Singapore (Registrationnumber 198702521E, regulated by the Monetary Authority of Singapore); Nomura Australia Ltd., Australia (ABN 48 003 032 513), regulated by theAustralian Securities and Investment Commission and holder of an Australian financial services licence number 246412; P.T. Nomura Indonesia, Indonesia;Nomura Securities Malaysia Sdn. Bhd., Malaysia; Nomura International (Hong Kong) Ltd., Taipei Branch, Taiwan; Nomura Financial Advisory andSecurities (India) Private Limited, Mumbai, India (Registered Address: Ceejay House, Level 11, Plot F, Shivsagar Estate, Dr. Annie Besant Road, Worli,Mumbai- 400 018, India; SEBI Registration No: BSE INB011299030, NSE INB231299034, INF231299034, INE 231299034).This material is: (i) for your private information, and we are not soliciting any action based upon it; (ii) not to be construed as an offer to sell or a solicitationof an offer to buy any security in any jurisdiction where such offer or solicitation would be illegal; and (iii) based upon information that we considerreliable. NOMURA GROUP DOES NOT WARRANT OR REPRESENT THAT THE PUBLICATION IS ACCURATE, COMPLETE, RELIABLE, FIT FOR ANYPARTICULAR PURPOSE OR MERCHANTABLE AND DOES NOT ACCEPT LIABILITY FOR ANY ACT (OR DECISION NOT TO ACT) RESULTINGFROM USE OF THIS PUBLICATION AND RELATED DATA. TO THE MAXIMUM EXTENT PERMISSIBLE ALL WARRANTIES AND OTHERASSURANCES BY NOMURA GROUP ARE HEREBY EXCLUDED AND NOMURA GROUP SHALL HAVE NO LIABILITY FOR THE USE, MISUSE, ORDISTRIBUTION OF THIS INFORMATION.Opinions expressed are current opinions as of the original publication date appearing on this material only and the information, including the opinionscontained herein, are subject to change without notice. Nomura is under no duty to update this publication. If and as applicable, NSI's investment bankingrelationships, investment banking and non-investment banking compensation and securities ownership (identified in this report as "Disclosures Required inthe United States"), if any, are specified in disclaimers and related disclosures in this report. In addition, other members of the Nomura Group may fromtime to time perform investment banking or other services (including acting as advisor, manager or lender) for, or solicit investment banking or otherbusiness from, companies mentioned herein. Further, the Nomura Group, and/or its officers, directors and employees, including persons, without limitation,involved in the preparation or issuance of this material may, to the extent permitted by applicable law and/or regulation, have long or short positions in, andbuy or sell, the securities (including ownership by NSI, referenced above), or derivatives (including options) thereof, of companies mentioned herein, orrelated securities or derivatives. In addition, the Nomura Group, excluding NSI, may act as a market maker and principal, willing to buy and sell certain ofthe securities of companies mentioned herein. Further, the Nomura Group may buy and sell certain of the securities of companies mentioned herein, asagent for its clients.Investors should consider this report as only a single factor in making their investment decision and, as such, the report should not be viewed as identifyingor suggesting all risks, direct or indirect, that may be associated with any investment decision. Please see the further disclaimers in the disclosure

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