A diminishing appetite may bleed into MBS from Fannie Mae and Freddie Mac
Two Bank of America credit analysts are advising investors to be more cautious of structured credit products, saying a number of market indicators point to a new “risk-off” phase, according to a Bloomberg report.
“We turn more defensive on securitized products and underweight on agency” mortgage-backed securities, wrote Chris Flanagan and Alexander Batchvarov, analysts at BofA. “Risk-off phase likely has started.”
The risk appetite among investors is diminishing, and this should affect investment-grade corporate spreads, the analysts said. Mortgage-backed securities from Fannie Mae and Freddie Mac, along with other higher-rated structured products, will also be likely affected. Bank of American continues to be neutral across the sector.
The analysts listed the 10-year Treasury yields, the spread between two-year and 10-year Treasuries, rate volatility, and investment-grade corporate spreads as key indicators of the trend.
Additionally, Flanagan and Batchvarov said that American equities may soon begin underperforming compared to Chinese counterparts. The view comes as US stocks appear to have peaked compared with the Shanghai Composite Index.
“All of these appear likely to have turned in recent weeks, and are now poised to extend moves in the most recent direction,” the analysts said. “August should provide good conditions to tactically position for curve flattening, lower rates, and wider spreads.”
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