MBS Supply Drought That Even a Great Glass of Sancerre is Unable To Remedy

While a great wine is indeed an all-purpose cure that can remedy all sorts of thirst-related problem, even a beautiful Sancerre is not likely to help us with the ongoing MBS supply drought. Please allow me to take a few minutes, and talk about this issue for a bit... but first, today, we will be delighting ourselves by consuming this great Sancerre Beauty:

Domaine Raffaintin-Planchon, Sancerre

Loire Valley, France

Despite the rather choppy ER performance of Mortgages in 'Q1, on the YTD basis the sector managed to pull off reasonably strong numbers. Much of this performance is owed to a stronger-than-expected bank demand, volatility decline, and the low level of MBS supply. And since we are coming into spring months, investors are focused on the net supply trend, and the strength of seasonal rebound.

To that end, March brought almost no relief to weary MBS travelers, with less than $11 billion in net issuance ($78 million in gross issuance), thus bringing the YTD total to just over $25 billion of net supply & $215 billion in gross issuance. The MoM increases were not enough to move out of the "supply drought" this year. Net Supply in Q1 2024 is still down -$2 Bln (-7%) compared to the first quarter of last year, and, in fact, Q1 2024 is the lowest Q1 since 2015.

And while we are expecting that May will bring us some additional supply, the April increase is likely to be rather underwhelming. One clear positive that is emerging from this "supply drought" is fundamental support for MBS valuations. Yet, given the fact that presently, mortgages do not appear to be very cheap, at least not on a historical basis, this supply support may be just the factor that will push investors into the MBS buying mode.

Using the combined 'Q1 Net issuance of $25 billion as a jumping off point, we are likely to end the year just above the $205 billion mark, which is ~6% higher than what we projected in our 2024 outlook. That being said, as new developments in the housing finance sphere unfold (such as title insurance "waiver"), we might be in for a bit of a supply surprise (on the upside). Yet, we are still unlikely to see more than $225 billion, even if this surprise does come to fruition.

That $25 billion of net supply number hides some rather extreme tendencies. In fact, conventional MBS have experienced negative supply growth for the last two months, brining the YTD total to almost -$8 billion, while Ginnie Mae was responsible for almost $34 billion of net supply . The poor showing in the conventional space was driven mainly by 15yr pools with $24 billion of negative net issuance YTD.

In February, 15-year saw another $8 billion shrinkage of the sector, following a pattern established last year with an annual decline of almost -$99 billion of net supply in 2023, "beating" the recent record of 2018 (-$56 billion for the entire year). In the case of 2024, we fully expect to hit the -$985 billion of net supply mark.

Even if a glass (or two) of a great Sancerre will not solve our MBS supply problem, it will sure help to deal with it. Lets get to it!

There’s no doubt that the special terroirs found in this bucolic commune on the far Eastern edge of the Loire Valley have the magical ability to produce a wine that is universally adored all over the world. The proof is in the pudding, or in this case the Sauvignon Blanc. At their best these wines combine a crisp, energetic structure with crowd pleasing fruit and loads of mouth watering, saline minerality.

Today’s discovery from the tiny domaine of Raffaintin-Planchon hits all those notes and then some: it’s like a greatest hits album for Sancerre. There’s always a lull for these iconic wines during the holidays and winter months, as stocks run low and thoughts turn to warming reds, but spring is just around the corner.

Domaine Raffaintin-Planchon has been growing grapes and making wine in Sancerre for at least five generations, and today control about 15 hectares of vines spread out over a large collection of micro parcels.

When discussing vineyards in Sancerre it’s good to have a lay of the land, or in this case the terroir, of which there are three key types in this famous little region: silex, which is clay flecked with a healthy amount of flint, leading to very chiseled and age-worthy wines; terres blanches, which is Kimmeridgian limestone and clay–same stuff as you find in Chablis–that produces elegant, balanced wines with lots of oyster shell minerality; caillottes, which is essentially a limestone dominant gravel, leading to charming, fruit forward and aromatic expressions of Sancerre.

The Raffaintin clan has all three, though it is the latter two that dominate, and seek to use the best of each terroir to produce their village wine. The goal is a perfect snapshot of a particular vintage and the appellation writ large.?

Jean-Claude and his wife Marie are now joined by their son Antoine, and together they farm their small (by Sancerre metrics) estate according to lutte raisonée (a.k.a. sustainable) and organic practices. After harvesting when the fruit reaches an optimal balance of sugar and acidity, the grapes are fermented in stainless steel tanks and then aged on the lees for an additional four to six months before being bottled with a light filtration.

Antoine is increasingly pursuing a “non-interventionist” strategy in the cellar, including reducing sulfur additions, but without sacrificing the snappy, energetic texture and refreshing drinkability that is the calling card for all great, village level Sancerre.

The 2022 vintage is lovely and forward, and the Raffaintin-Planchon is exuberant and ready to go right out of the bottle. That said, a quick splash decant wouldn’t hurt, but be sure to serve the wine cool, not ice cold, in an all-purpose stem. The pale, straw yellow color with hints of translucent green at the rim opens up with a classic nose of apricot, lemon-lime zest, fresh hay, thyme, orange blossom, and honeysuckle over layers of stone fruits, Meyer lemon, and oyster shell minerality.

The bright, medium-light body makes this wine enjoyable on its own, but it really shines with a salad of citrus and goat cheese or a fresh, flakey fish like sole.

Take care

Sincerely,

Kirill A. Krylov, CFA, PhD