With mortgage origination volumes down, some analysts on Wall Street are urging investors to steer clear of the mortgage-backed securities market.
Investors have set aside cash to invest this year, but a yearend report from Morgan Stanley Dean Witter, written by Alec Crawford, vice president for mortgage strategy, sends a cautionary note on mortgages. In 2000, mortgages "present a relative value conundrum," the report said. The firm recommends that investors maintain a neutral weighting for residential mortgages in their portfolios. "Opportunities seem much more attractive in other sectors," the firm said.
It said mortgage securities are fairly priced relative to Treasuries but that there may be bargains in other asset classes.
Morgan Stanley said it expects the supply of mortgages will be "a small fraction" of what it has been in recent years but that demand will be "extremely robust from all investor types." Bond market volatility will play a key role in determining mortgage returns, the report said. Though volatility may continue to decline initially, the firm cautioned, it could increase in the long term, hurting mortgages.
"Mortgages are one of the more expensive spread products out there," said a mortgage trader from another Wall Street firm who agreed with Morgan Stanley's outlook. In 1999, mortgage-backed securities have done "phenomenally well" and outperformed the rest of the securities market, he said, adding that spreads are now as "tight as they were going back to the spring of 1998. …