Goldman Sachs MBS Trading Strategy: Short GN II/FN 4.5s Swaps, Bullish on Prime Jumbo RMBS

Overview

This report is an update on trader views from the Goldman Sachs Mortgage and Structured Products team, with core conclusions showing significant structural divergence. In the Agency Mortgage-Backed Securities (MBS) sector, the report explicitly shorts the relative performance of GN II/FN 4.5s swaps, recommending a "short 4.5s swaps + long 4.0s swaps" combination to capture spread convergence opportunities. Regarding Non-Agency Mortgage-Backed Securities (RMBS), the report argues that the recent rebound in mortgage rates has effectively suppressed prepayment risk, revealing and maintaining a reasonable valuation advantage for Prime Jumbo RMBS relative to benchmark TBAs. In the Asset-Backed Securities (ABS) sector, although macro consumer sentiment indicators have hit historic lows, actual credit data demonstrates remarkable resilience, with delinquency rates following seasonal patterns; however, divergence in financial security among different income groups may signal further divergence in credit performance between Prime and Non-Prime ABS in the future.

Core views

Agency MBS Relative Value Restructuring: Shifting from Refinance-Driven to Purchase Loan-Dominated The report notes that after hitting a low of -12 ticks in January, the GN II/FN 4.5s swap quickly rebounded to approximately 6 ticks, a move highly correlated with the timing of the shortening effective duration of the GN II 4.5s TBA. Previously, this swap benefited from a higher proportion of refinance loans in the GN II pool compared to traditional pools; refinance loans have a much faster Weighted Average Loan Age (WALA) burn-up rate than purchase loans, thereby shortening duration. However, with the recent rise in mortgage rates and expected increases in purchase loan issuance during the spring and summer seasons, the GN II issuance structure is shifting back towards purchase loans. A flatter WALA burn curve for purchase loans will once again extend the effective duration of GN II 4.5s, eroding their duration advantage over FN 4.5s. Supply-side pressure is another key bearish factor. Data shows that the deliverable float size for GN II 4.5s in the 2025-26 vintage is significantly larger than that of FN 4.5s in the same vintage; this supply imbalance will exert continuous downward pressure on swap prices. In contrast, the float sizes for GN II 4.0s and FN 4.0s in the same vintage are much closer, indicating a relatively balanced supply-demand relationship. Based on the aforementioned duration repricing logic and supply differences, the report expects the GN II/FN 4.5s swap to face downward pressure in the coming months, with its spread relative to the 4.0s swap narrowing; therefore, it recommends shorting the 4.5s swap and holding the 4.0s swap. Prime Jumbo RMBS: Prepayment Risk Retreat Opens Valuation Repair Window Prime Jumbo RMBS has recently outperformed the market, with the OAS spread between its Super Senior Non-Rated Pass-Through (SSNR PT 5.5s) and same-maturity FN TBA narrowing to approximately 20bp, returning to late-2025 levels. This convergence was primarily driven by the decline in prepayment risk triggered by rising mortgage rates over the past three months. The current spread level, after adjusting for collateral rate incentive factors, is consistent with historically observed reasonable relationships, indicating that valuations are not significantly deviating from fundamentals. Looking ahead, if mortgage rates remain at current levels, the Gross Weighted Average Coupon (GWAC) of future new Jumbo deals will gradually climb, bringing underlying assets closer to "at-the-money" status, which will further compress the OAS/price spread relative to TBA. Meanwhile, execution arbitrage space continues to shrink, with new deal pricing increasingly aligning with fair value estimates. Issuance remains healthy; cumulative issuance year-to-date exceeded $16 billion as of May 28, with monthly averages slightly above同期 levels in 2025, and the full-year Prime issuance forecast maintained at $52 billion. Prepayment data shows that the April peak corresponded to interest rate lows in January-February, while following the rate reversal in May, prepayment rates across all GWAC buckets declined, confirming the trend of risk mitigation. Consumer ABS: Significant Divergence Between Sentiment and Fundamentals, and Internal Fractures Macro sentiment shows剧烈 divergence. The University of Michigan Consumer Sentiment Index final reading for May 2026 fell to a historic low of 44.8, declining for three consecutive months and below the previous low in June 2022; nearly 48% of respondents in the last three months cited "high prices" as the primary eroder of personal finances, the highest on record. In stark contrast, the Conference Board Consumer Confidence Index dipped only slightly to 93.1, remaining at the 40th percentile since 1980, indicating relative robustness. This difference stems from their different anchoring factors: the Conference Board index relies more on labor market conditions, where the current equilibrium of "low hiring, low layoffs" supports its reading; whereas the Michigan index better reflects personal financial perceptions, suffering more direct impact from gasoline prices (hovering near $4.40/gallon) and rising inflation. The Philadelphia Fed LIFE survey reveals structural fractures behind the sentiment. Although concern levels regarding "ability to make ends meet" decreased year-over-year for almost all groups, the improvement was largest for high-income groups with annual incomes over $150,000, while the decline in concern was much smaller for middle- and low-income groups. In the ABS market, this divergence may translate into a further widening of delinquency rates between Prime and Non-Prime borrowers. However, despite sentiment hitting bottom, actual delinquency performance in Consumer ABS remains remarkably insulated. Following the end of the tax refund season, the decline in D30+ delinquency rates for Prime Auto, Subprime Auto, and Unsecured Consumer ABS was consistent with historical seasonal patterns. A sample analysis of 142 unsecured consumer ABS transactions originated before 2024 shows that April delinquency patterns remained consistent with previous trajectories. The report maintains its baseline judgment: the threshold for rising oil prices to directly transmit into higher delinquency rates remains high; while Subprime Auto ABS is most vulnerable due to direct exposure to stressed subprime consumers and close ties to transportation costs, overall credit deterioration has not yet occurred.

Analysis framework

This report employs a typical fixed income relative value analysis framework, unfolding along two main lines: micro-structure analysis and macro-fundamental validation. In the Agency MBS section, analysts utilized a "Loan Type-Duration Dynamics" transmission model. Instead of simply comparing the nominal spreads of two swaps, the report deeply deconstructs changes in underlying collateral composition (refinance vs. purchase loan ratios), the impact of WALA burn rate differences on effective duration, and the supply-demand matching of deliverable float sizes. The core of this methodology lies in identifying pricing distortions caused by short-term capital flows or issuance structure twists, rather than long-term fundamental changes, representing a classic trading-oriented relative value analysis. In the Prime Jumbo RMBS section, the report adopted an "OAS-Rate Incentive Factor" calibration analysis method. By comparing observed OAS spreads with spread distributions under identical rate incentive conditions in historical data, it judges whether current valuations are reasonable. Simultaneously, it supplements this with execution arbitrage monitoring and GWAC trend extrapolation to construct a multi-dimensional valuation verification system. This approach avoids viewing absolute spread levels in isolation, instead evaluating them within the dynamic function of the interest rate environment. In the Consumer ABS section, the report demonstrates a "Sentiment-Behavior-Outcome" three-layer verification method. First, it acknowledges the extreme readings of macro sentiment indicators, but immediately introduces labor market data as a counter-perspective to explain the root causes of sentiment divergence; furthermore, through income-stratified data from the Philadelphia Fed LIFE survey, it decomposes aggregate sentiment into micro-signals mappable to ABS credit tranches; finally, it uses the seasonal patterns of actual delinquency rates as a "fact check" to confirm that sentiment has not substantially penetrated into credit performance. This progressive analysis effectively distinguishes noise signals from real risk transmission.

Methodology notes

• Industry/Sector Analysis Framework

  Loan Type-Duration Transmission Mechanism in Agency MBS Swap Pricing

  When analyzing the spread between Ginnie Mae and Fannie Mae swaps, one cannot look solely at nominal coupons; it is necessary to delve into the underlying collateral composition. The Weighted Average Loan Age (WALA) of refinance loans burns faster than that of purchase loans, causing pools with a higher proportion of refinance loans to have shorter effective durations and higher prices. When the proportion of these two loan types changes in the issuance structure, the swap spread will reprice accordingly. This is the core micro-mechanism for understanding Agency MBS relative value.

• Fixed Income & Credit AnalysisSpread analysis

  Historical Calibration of OAS Spreads and Rate Incentive Factors

  When assessing the valuation reasonableness of non-agency RMBS, one should not view the absolute OAS level in isolation, but rather combine it with the collateral's rate incentive factor (i.e., the difference between current market rates and underlying asset coupons) and compare it against the spread distribution range under identical incentive conditions in history. This removes systemic shifts caused by changes in the interest rate environment, identifying true relative cheapness or expensiveness.

• Corporate Fundamentals & Financial Framework

  Stratified Interpretation of Consumer Sentiment Indicators and Credit Transmission Thresholds

  The compilation methodologies of different consumer confidence indices determine their sensitivity to different economic variables: the Michigan Index anchors on personal financial perceptions and is sensitive to prices and energy costs; the Conference Board Index anchors on the labor market and is more sensitive to employment stability. When assessing ABS credit risk, it is necessary to decompose aggregate sentiment into income-stratified data and set empirical thresholds for the transmission of external shocks like oil prices to delinquency rates, avoiding being misled by a single sentiment indicator.

Key data

• Current Price of GN II/FN 4.5s SwapApprox. 6 ticksRapid rebound from January low of -12 ticks
• Prime Jumbo SSNR PT 5.5s vs FN 5.5s TBA OAS SpreadApprox. 20bpNarrowed to late-2025 levels; within reasonable range after rate incentive adjustment
• YTD Prime Jumbo RMBS Cumulative Issuance (2026)Over $16 billionAs of May 28; monthly average slightly above同期 2025 levels
• 2026 Full-Year Prime Mortgage Issuance Forecast$52 billionIncludes Jumbo and agency-eligible transactions
• University of Michigan Consumer Sentiment Index (May 2026 Final)44.8Historic low, below previous low in June 2022
• Conference Board Consumer Confidence Index (May 2026)93.1Slight decrease from April; at 40th percentile since 1980
• Average Gasoline PriceApprox. $4.40/gallonLevel after three months of ongoing Middle East conflict
• Share of Respondents Citing High Prices as Primary Financial Concern (3-Month Moving Average)48%Highest on record

Impact & implications

For Agency MBS traders, the relative value window for the GN II/FN 4.5s swap is closing; current levels offer an opportunity to short this swap and switch to the 4.0s swap, but close monitoring is required to see if the spring/summer purchase loan issuance pace accelerates as expected. For Prime Jumbo RMBS investors, the current OAS spread is in a reasonable range; if rates stabilize and GWAC continues to rise, the spread may compress further, and execution economics will improve, making it suitable for allocation demands seeking quality up-tiering. For ABS investors, although macro sentiment is extremely pessimistic, actual credit data has not yet deteriorated, so now is not the time to sell based on sentiment panic; however, vigilance is needed regarding the continuing divergence in financial security between high-income and low-income groups, which may manifest in the coming quarters as a widening of delinquency rates between Prime and Non-Prime ABS, with Subprime Auto ABS remaining the relatively vulnerable segment. Overall, the report suggests that in the current interest rate and geopolitical environment, structured product pricing is driven more by micro supply structures and segmented customer behavior than by simple linear extrapolation of macro sentiment.

Risks

• Unexpected sharp decline in mortgage rates could lead to a rebound in the proportion of GN II refinance loans, reversing the duration disadvantage of the 4.5s swap
• Seasonal growth in purchase loan issuance falls short of expectations, delaying the migration of GN II issuance structure towards purchase loans
• Sustained surge in oil prices breaking historical thresholds, triggering an unexpected rise in Subprime Auto ABS delinquency rates
• Sudden deterioration in the labor market breaking the "low hiring, low layoffs" equilibrium, dragging down the Conference Board Confidence Index and impacting overall consumer credit
• Rising probability of Fed rate hikes leading to tightened liquidity, affecting valuations of all structured products

What to watch

• Monthly changes in GN II and FN 4.5s deliverable float sizes and the ratio of refinance to purchase loans
• Pace of GWAC climb in new Prime Jumbo transactions and the sustainability of OAS spread convergence
• Whether the divergence between the University of Michigan and Conference Board Consumer Confidence Indices widens or narrows
• Trends in financial security among different income groups in the Philadelphia Fed LIFE survey
• Whether Subprime Auto ABS D30+ delinquency rates begin to deviate from seasonal patterns
• Gasoline price trends and changes in market pricing of the Fed's 2026 rate hike path