Strong prices for mortgage securities with hefty yields are giving holders a good reason to sell, according to PaineWebber Inc.
Demand has risen, the investment firm says in a report, partly because rates have steadied in the wake of the Fed's recent inaction. As a result, investors are willing to accept the risks that stem from sensitivity to changes in rates.
The technical measure of such sensitivity is called "negative convexity." The term reflects the idea that as rates rise, prepayments slow down and the cash flows from the mortgage securities are extended. The result is higher risk, because prices of longer-duration securities are more volatile.
"The low level of (yield) volatility in the market has given comfort to investors who seek yield in return for underwriting more negative convexity," the report said. "We believe this is a bad time to be making that trade-off, as investors are not compensated for the options they are writing."
Because borrowers can prepay their loans at any time, they are considered to have a free put option from the investor.
First Union Capital Markets Corp. has released $157 million of securities backed by home equity loans under a previously filed shelf registration.
The loans were originated by First Union Home Equity Bank and pooled by the mortgage finance group at Lehman Brothers. The pool is also backed by an insurance policy from Financial Guaranty Insurance Co.; as a result, the asset-backed issue is rated triple-A by Standard & Poor's and by Moody's Investors Services.
A Financial Publishing Co. division that supplies data and analytics about mortgage securities has been bought by Thomson Financial Services.
Terms were not disclosed.
The division provides value-added current and historical indicative data, according to an announcement by Thomson, which also owns American Banker.
The acquired unit will become part of Muller Data/Thomson Securities Information Services, an alliance between Muller Data Corp., Asset Backed Securities Group, and MuniView.
- Dow Jones