The Post-Crisis World: Where Will Agency MBSs Trade?
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Date: 11-03-2008
Start Time:
6:00pm
End Time: 7:30pm
Speaker: Leon Tatevossian, Zetian Capital, LLC & Columbia University (IEOR)
Location: 412 Schapiro CEPSR, Davis Auditorium
ABSTRACT
At least since the late 1980's, the "mortgage basis" has been the ground-level indicator for the pricing of agency MBSs versus the "pure" interest-rate market. The basis can be defined in several related ways, but the fundamental concept is the same: The basis is a yield differential (either "nominal" or "option-adjusted") between a generic agency MBS and a point (or "blended" point) on a base interest-rate curve. Understanding the basis's drivers and formulating opinions about its directionality and variability are, either directly or indirectly, implicit in all decision-making in the mortgage market. This applies to broker/dealer market-makers, portfolio managers, and hedge-fund traders. Moreover, the dynamics of the mortgage basis can affect asset-allocation choices across the broader fixed-income market.
The basis' special status is due to the interaction of many market variables. Some of these factors (yield curve shape, interest-rate volatility) are readily observable, and others (borrower prepayment behavior) require models to quantify their impact. Another category of drivers is more indefinite, such as the relative demand of agency versus "private-label" MBSs, the economics of structured product origination, funding costs of depository institutions, and the GSE's orientation towards credit risk versus prepayment risk.
The credit crisis and the dramatic sequence of events this year (the Bear Stearns takeover, conservatorship status of the GSEs, the Troubled Asset Relief Program) have added unprecedented uncertainty to the understanding of the basis (and forced us to revisit many familiar assumptions). This talk will try to make sense of the current conditions and explore what they mean for a new "normative" level of the mortgage basis.
BIO
Leon Tatevossian has nineteen years of experience in the fixed-income capital markets, including positions as a trader, quantitative strategist, derivatives modeler, and market-risk analyst. Currently, he is a consultant at Zetian Capital, LLC, a recently-launched fixed-income macro hedge fund (based in Westlake Village, California), and an associate in financial engineering in Columbia's IEOR Department. Until November 2007, Leon was a principal and senior trader in the Principal Finance Group at Banc of America Securities. PFG is an internal ABS-oriented hedge fund within BAS’s Global Structured Products area.
His prior experience includes strategist/modeler roles in US Treasury securities, US agencies, interest-rate derivatives, and mortgage-backed securities at Morgan Stanley, Salomon Brothers, and Countrywide Securities. From 1994-95, Leon traded US agency securities at Citicorp Securities. He was a derivatives analyst in the Firmwide Risk Department at Goldman Sachs from 2000-03.
Leon holds an S.B. degree in mathematics from the Massachusetts Institute of Technology. He was a graduate student in mathematics at Brown University.