medium · Asset-Backed Securities asset-nuances
An analyst compares a senior non-agency RMBS bond at T+150 basis points with a similar-duration Fannie Mae MBS at T+40 basis points. The comparison assumes broadly similar prepayment exposure.
Which explanation best identifies the additional spread components in the non-agency bond?
- The gap is entirely negative convexity, even though the comparison assumes similar duration and prepayment exposure in both securities.
- Fannie MBS has no market or prepayment risk because its guaranty is the full faith and credit of the United States.
- Ten percent subordination eliminates all non-agency credit risk, so the remaining spread gap must reflect only coupon convention.
- The non-agency bond carries residual credit and liquidity premiums; Fannie MBS has Fannie Mae's guaranty, not U.S. full-faith-and-credit backing.
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