Good summary of the current state of affairs from Ms. Ross at Wunderlich this morning.
“So far, AGNC, TWO and MFA were able to maintain dividends, while CYS, IVR, HTS, and CMO cut. We think the difference in performance can be attributed to asset selection, but there is no doubt the flatter curve will put pressure on spreads.
We believe the next quantitative easing will focus on agency MBS in order to keep mortgage rates low, but the fact that $1.1 trillion of bonds are held offshore and $1.6 trillion are held by financial institutions that might have to downsize because of deteriorating sovereign debt means that QE3 might not be effective at driving mortgage rates lower, though the benchmark 30-year fixed rate mortgage is likely to stay around 4% for the first half of 2012.
Despite market pressures, the mortgage carry trade is alive and well, and we think the top performers continue to be undervalued.
The indirect linkage between US MBS and foreign debt shows the point that I keep trying to make — even though you hold uncorrelated assets when they are in a bull market, liquidation hits all.