RMBS rally to continue

Fixed income broker FIIG Securities has forecast that the contraction in spreads on residential mortgage-backed securities, evident in the ME Bank and ING Direct issues this month, will continue.

In the latest issue of its client newsletter, The Wire, FIIG said approved-deposit taking institutions were turning to repo-eligible RMBS to provide higher returns in their high quality liquid asset portfolios.

Margins on other HQLA assets have contracted since the start of the year. FIIG said major bank bonds were selling for around 65 basis points over the swap rate, covered bonds were 50 basis points over swap and regional bank bonds were 100 basis points over swap.

RMBS must be repo-eligible to be available for HQLA investment. FIIG said AAA-rated repo-eligible RMBS was selling for an average margin of 178 basis points in the secondary market.

FIIG said: "While it is not guaranteed, we anticipate repo-eligible RMBS spreads will contract, similar to the contractions of the senior and covered bonds."