Morgan Stanley is putting out its own version of the “big short”, though not quite as big. The bank sees a way to profit by shorting residential mortgage-backed securities, so they are pitching a trade. They think spreads between Treasuries and RMBS are set to widen, so they propose a short-sell on RMBS and a long-position of half the size on five and ten-year Treasuries. MS outlines the context for the trade, saying RMBS “enjoyed outsized technical support as the Fed’s balance sheet increased historically, and net issuance is running at post-crisis highs as the Fed is reducing its holdings of MBS”. MS says the trade is also a good hedge.
FINSUM: This trade seems very technically-driven to us, but MS comments little on the fundamentals of the mortgage market. Surely if RMBS suffers a big drop that is going to have major implications for all asset classes.