How to prep for MBS trading?
I started a junior trader position very recently on the mortgage desk at an institutional AM firm. The firm is not small (>250B AUM), but does not offer structured training of any sort. My main day to day tasks are: answer phone/take bids, entering and allocating trades to hedge/adjust portfolio risk, and running reports. I have a good amount of downtime throughout the day, which I use to study and read market commentary.
The PM tells me I should be able to understand strategies behind trades in a few months, and be able to formulate my own trade ideas in 6mo/1yr. What else could I do to speed up the process of understanding the fixed income/MBS market? What screens on BB to follow, resources to decipher trader lingo, good books/primers, etc?
If you haven't been told this already read the Handbook of MBS Securities by Fabozzi. I interned in MBS trading at a BB this summer and they dropped that book on an intern's desk the first day. It's pretty brutal but comprehensive. As for BBG I would start looking at individual securities and hitting 'CFT' or I think the other is 'SYT' to look at the cash flows and how the price responds to changes in prepay/default speeds and other parameters. Try to get an understanding of how things like FICO, LTV, Refi vs. Purchase, WAC, WAM, etc. affect prepay speeds. Know what CDR and CPR are.
I'm not sure how much you know already but I think the first step is getting a really solid understanding of where the fundamental value of these securities comes from and how the many different parameters affect the price. Follow the TBA market daily and look at how spreads between different coupons change and try to figure out why. Understand where the price difference between GNMA, FNMA and FHLMC securities comes from.
Also depends a lot on specifically what you're doing. If you're just trading whole loans (not actual MBS) that's very different from understanding MBS derivatives like IO/PO etc. For market commentary read the MBS research put out by BB research teams assuming you have access to it. More color on exactly what kind of stuff you're doing what help. As mentioned I've only done an internship but I'm going back for FT and feel like I know this area at least a little.
Thanks for the reply, this is great advice. It looks like it's mostly passthru pools/TBAs/CMOs/ARMs
Haha so basically everything. Start by understanding passthroughs and like I mentioned how FICO/LTV/WAC/WAM/DTI etc. affect the pool (hint whether the pool trades at a discount or premium makes a HUGE difference since the affects are basically opposite). After you really get passthroughs down you can start trying to understand the structured stuff. Also you can probably ignore credit risk if you're mostly doing agency stuff since higher default speeds just mean higher prepay speeds for agency MBS (you'll learn that in the book).
This post from Anonymoose is very good. some other Bloomberg functions for when you have a bond loaded into a window are CLC, CLP, MTCL, GEO, OAS1, YT (or SYT if enabled), PVG to just name a few,..id also say know how to look up bonds on TRACE, knowing about prepays is huge cant stress that enough, know what negative convexity is and what convexity hedging is, know what happens to different structures in rates up and down scenarios. pm me if youd like, i look at this stuff all day long from a sell side seat
Are you on a desk that focus on agency MBS and derivatives (IO/POs/CMOs/etc.) or non-agency RMBS? The latter is more credit based while the former is rates/convexity based.
In the agency space, you need to familiarize yourself with the factors that affect prepays (e.g., rates/vintage/WAC/FICO/LTV/Servicer/policy risk etc.), liquidity in the stack, technical moves (e.g., servicer hedging), and how this all ties in within the general rates/fixed income market… of course, learning how to decompose changes in px (OAS/Vol/Rates/Slope of the curve/etc.)
Could talk for days about the resi credit market, but this is much more fundamental credit based than it is rates based in the agy market.
Just learn the different products, who the players are in each market, and pay attention to flows… you will learn over time. I haven't found a good markets based MBS book that I would recommend.
Yes, I will be focusing on agency MBS.
I was under the impression that the non-agency RMBS stuff is relatively similar to agency stuff since most of the recently issued non-agency MBS are very high credit quality. But I guess credit risk is still very important in the lower parts of a CMO structure. I'm starting in sell-side non-agency RMBS I think so I would love to hear any insight you have on how to prepare / the non-agency space in general. There's not a lot of great info on mortgage trading here, particularly with respect to non-agency.
That is true for most of the new issue deals with newly originated collateral (re: Prime Jumbo), but that's BC only AAAs are being sold into the capital markets. The subordinate tranches are being retained by the issuers. The AAAs are going to be more comparable to agency passthroughs in terms of risk and price at a drop to TBAs.
However, most flow are from Legacy Securities and other issuance is from seasoned and/or distressed collateral (e.g., NPLs, RPLs, etc.). Those are credit bonds.
PM me, I trade specified pools at one of the major BBs
In MBS, it is difficult to pick things up without being in a seat where you're surrounded by the concepts. I think you should read as many of the bank primers as you can get your hands on. If you're in agency MBS you would need a good grasp on the Mortgage Dollar Roll. BoA probably has the best primer around so you should get a copy of that. PM me for other specific questions. I'm on a passthrough desk at one of the bigger dealers in agency MBS.
Andrew Davidson published three books on the topic that are very good.
I've been in Secondary Marketing for a couple of years trading and hedging residential agency loans, and I'm wondering if it'd be possible for someone like me to get into MBS. It's been great working at the lending firm, but I'd really like to get deeper into what happens after the loans get sold to the investors/GSEs. Background: biology major at a non-target, non-traditional route but eager to learn and taking financial modeling classes on my own. Located in Los Angeles/Orange County.
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