27 March 2015 US Fixed Income Weekly The view in enOrtgeirje credit Existing home sales skimmed under forecasts on Monday (+1.2% instead of +1.7%) while new home sales jumped that threshold Tuesday (+7.8% instead of -3.5%). The FHFA home price index came in Tuesday up YoY by 5.48%. Housing continued to deliver mixed signals. although generally showing modest growth and decelerating home price appreciation. Adding up to fair value in 62/FN With the first month of MIP-induced prepayments behind us and agency MBS prices showing some signs of stability post the March FOMC meeting, now presents a fine time to revisit relative value in agency pass-throughs. Sticking to our fair value formula (first detailed in our special report from January 27, 2015), we find that at current levels: • GN2/FN 4.5% looks quite rich and we recommend shorting, even though it is negative carry (-1/32 per month) • GN2/FN 4.0% looks modestly rich, and being short is slight positive carry (<1/32 per month) Research Analyst Research Analyst [Figure 6.. Framework for evaluating fair value in Ginnie Mae II/Fannie Mae swaps Cpn FNCL Px OAS OAD Incremental value (discount) of Pay Delay Liquidity Credit Prepayment Total G2/FN Fll G2/FN Act Act- F1/ Net Cony 2.50 98.314 17 6.78 0-007 -0.114 0-281 0-161 1-016 0-300 -0-036 0-030 3.00 102-07 4 6 5.4 0-006 -0-062 0-232 0086 0-264 0-234 -0-030 0-015 3.50 104-305 -3 4.14 0-007 -0056 0-165 -0075 0-040 0-034 -0-004 0-014 4.00 106-250 -6 2.69 0-006 -0-014 0-083 -1-015 -0-261 -0-150 0-111 -0-005 4.50 108-185 27 3.37 0-007 -0-022 0-117 -2-034 -1-251 -0-030 1-221 0-012 503 111-010 10 2.95 0-007 -0-080 0091 -1-160 -1.140 -1-160 -0-020 0-001 Nen al I ArS • IbteriN as of COB 312115 Method:log 0snIncl briar Cm assterin meal nom* ratios Spin Deux,* Sint Fair value framework To estimate fair value, we separate and price out the component risks (pay delay, liquidity, cred