Cautious on MBS near term, low coupons outperform high coupons; pressure on CMBS offices is not over

Overview

This report is Goldman Sachs' strategy update on the U.S. securitized products market, covering Agency MBS, prime RMBS, CMBS, issuance, and cross-asset valuation. The core tone is "short-term caution": the MBS basis is influenced by Treasury yields, rate volatility, geopolitics, and the Fed reaction function, with near-term widening risk higher than tightening risk; however, assuming geopolitical conditions ease in the fourth quarter, the report still maintains its year-end spread-tightening target. The RMBS section emphasizes convexity differences across prime collateral types and OAS pickup; the CMBS section focuses on office-loan delinquency pressure, higher refinancing costs, and the maturity wall.

Core views

First, the MBS basis has recently been highly correlated with the 10-year Treasury yield, and spreads may remain under pressure if oil prices, inflation expectations, or Fed communication deteriorate. Second, within the 30-year Agency MBS coupon stack, low coupons are more likely to benefit from rate normalization and a pullback after a potential rate rebound, while high coupons face greater extension risk if rates rise further. Third, mortgage REITs remain net buyers of Agency MBS, but demand slowed in the second quarter versus the first, and the full-year demand forecast was revised down. Fourth, prime investor RMBS has better convexity at similar OAS pickup, and therefore is preferred over prime jumbo and owner-occupied agency-eligible RMBS. Fifth, recovery in the CMBS office segment is slow, with older properties, floating-rate loans, loans originated before 2022, and future refinancing of low-coupon loans as the main risk points.

Analysis framework

The report mainly uses a spread and duration-convexity framework to analyze Agency MBS and RMBS, judging relative value through Treasury OAS, TBA comparisons, relative valuation within the coupon stack, REIT holding changes, and issuance structure; the CMBS section combines delinquency rates, property types, loan vintages, DSCR, floating-rate loan share, building age, geographic concentration, and maturity year to assess the persistence of stress in office loans.

Methodology notes

• Fixed income relative valueOAS and TBA relative value

  Compare the Treasury OAS differences between RMBS tranches and same-coupon FN TBA.

  If two assets have similar OAS pickup, but one asset has better convexity or lower negative convexity, then that asset has higher risk-adjusted relative value.

• MBS coupon structureCoupon stack analysis

  Compare OAS, duration, convexity, and prepayment sensitivity from FN2.0s to FN6.5s.

  The report believes low coupons have already widened materially and benefit from rate normalization, while high coupons may underperform due to extension risk if rates continue to rise.

• CMBS credit analysisDelinquency rate, DSCR, and maturity wall framework

  Break down CMBS office risk by property type, loan year, rate type, and maturity year.

  High vacancy in office loans, rising debt costs, pressure on floating-rate loans, and refinancing needs through end-2027 together support the view that delinquency rates will remain elevated.

Asset mapping & comparison

Structured mapping from thesis to named assets (strengths, weaknesses, peers, risks).

• Agency MBS

  Core covered asset, with a near-term cautious view but unchanged year-end target.

  Strengths

  If geopolitical conflict eases and rates decline, spreads may tighten; low coupons may benefit from rate normalization.

  Weaknesses

  Sensitive to Treasury yields, rate volatility, and duration extension risk; mortgage REIT demand forecasts have been revised down.

  Comparison

  Compared with IG corporates, recent MBS spread changes have been highly correlated with Treasury yields; high coupons are more vulnerable than low coupons if rates rise further.

  Risks

  Another rise in oil prices, loss of market confidence in FOMC communication on price stability, 10-year Treasury yields rising above 4.8%-5.0%, redemption pressure.

• FN2.0s-2.5s

  Tactical overweight direction.

  Strengths

  OAS has widened to near end-2025 levels and may benefit from normalization in the Middle East situation and lower rates.

  Weaknesses

  If rates continue to rise, low coupons may still face duration-related volatility.

  Comparison

  Relative to FN6.0s-6.5s, low coupons are currently more attractively valued.

  Risks

  Further increases in rates and volatility cause broad pressure on the MBS basis.

• FN6.0/5.0 swap

  The report recommends shorting this swap, using about a 50% hedge ratio.

  Strengths

  Used to express the view that high coupons may underperform.

  Weaknesses

  If prepayment risk rises again or high coupons continue to be supported by technicals, the trade may be unfavorable.

  Comparison

  High-coupon OAS is tighter versus end-March, while low and lower-mid coupons are wider.

  Risks

  A rapid decline in rates or changes in prepayment expectations may weaken the short thesis.

• prime investor RMBS

  Preferred asset within prime RMBS.

  Strengths

  Has similar OAS pickup to prime jumbo, but more favorable convexity; most collateral is conforming balance and behaves similarly to non-owner-occupied agency collateral.

  Weaknesses

  As private-label RMBS, it still requires compensation for liquidity and credit risk.

  Comparison

  Preferred over prime jumbo and owner-occupied agency-eligible deals; the latter have smaller pickup and worse convexity.

  Risks

  Changes in the rate path, collateral prepayment behavior deviating from expectations, wider private-label liquidity discount.

• CMBS office loans

  A key source of credit pressure highlighted by the report.

  Strengths

  Newer buildings and prime locations have support from flight to quality, and the New York market has tenant diversity and a foundation of long-term demand.

  Weaknesses

  Overall delinquency rates remain above pre-pandemic levels, with clear pressure from older office buildings, low occupancy, high financing costs, and floating-rate loans.

  Comparison

  Compared with property types such as retail and hotels, offices show more persistent stress and are the main contributor to CMBS delinquency rates.

  Risks

  Refinancing pressure through end-2027, loan coupons resetting from about 4% to higher levels, New York concentration risk, regulatory or demand shocks.

Key data

• Year-end current coupon Treasury OAS target25bpThe report maintains this year-end target while remaining cautious in the near term.
• Year-end Brent crude forecast$80/桶From Goldman Sachs' commodities team; the report uses it to support the assumption of easing geopolitical conflict in the fourth quarter.
• Agency MBS net purchases by mortgage REITs in 2Q26约75亿美元Below the first quarter, mainly due to slower new capital raising.
• 2026 full-year forecast for mortgage REIT Agency MBS net demand300亿美元Previously forecast at $40 billion.
• AGNC second-quarter equity financing1.67亿美元Significantly below the prior pace of about $500 million per quarter over the previous 11 quarters.
• Share of owner-occupied agency-conforming collateral in prime RMBS issuance in 1H26约10%About double its share in 2025 prime RMBS issuance.
• Prime jumbo / prime investor SSNR PT 5.5s OAS pickup versus FN TBA 5.5s约25bpThe report believes prime investor has better convexity at similar pickup.
• Office loans as a share of CMBS collateral约三分之一The report says office loans are the main source of elevated CMBS delinquency rates.
• Floating-rate loans as a share of outstanding CMBS collateral约14%Floating-rate loans directly bear the financing-cost shock after the Fed hiking cycle.
• Average coupon on office loans awaiting refinancing vs. average coupon on new 2026 loans约4% vs 6.9%Higher refinancing costs for maturing low-coupon loans are an important reason for delinquency pressure through end-2027.

Impact & implications

From an investment standpoint, the report does not recommend simply betting on an immediate tightening of the MBS basis, but instead expressing risk preference through the coupon stack: overweight low coupons and avoid or short relative value in some high coupons. Within RMBS, it prefers prime investor because its OAS compensation is close to prime jumbo but with better convexity. Within CMBS, office-related exposure—especially older properties, floating-rate loans, maturing low-coupon loans, and newer vintages with high New York concentration—requires higher risk compensation and continued monitoring.

Risks

• Deterioration in the geopolitical situation pushes up oil prices, inflation expectations, and rate volatility.
• Declining market confidence in the FOMC's commitment to maintaining price stability causes front-end volatility to transmit to the long end.
• If the 10-year Treasury yield rises to 4.8%-5.0% or above, it may trigger fund outflows and pressure the MBS basis.
• Slower new capital raising by mortgage REITs reduces technical demand for Agency MBS.
• After the merger between TWO and CrossCountry is completed, MBS holdings may be liquidated, creating downside risk to the demand forecast.
• Rising refinancing costs for CMBS office loans, especially low-coupon loans maturing before end-2027.
• Rising concentration of New York office loans in newer vintages creates geographic concentration risk.

What to watch

• Market reaction to hike probabilities and forward guidance around the July 28-29 FOMC meeting.
• Whether Brent crude continues to rise, and whether the Middle East conflict eases before the fourth quarter.
• Whether the 10-year Treasury yield approaches or breaks through 4.75% and the 4.8%-5.0% range.
• Whether current coupon Treasury OAS reverts toward the 25bp year-end target.
• Subsequent capital raising, leverage, and Agency MBS/TBA holding changes by mortgage REITs.
• Relative changes in new-issue prime RMBS OAS differential versus TBA.
• CMBS office 30+ day delinquency rates, DSCR, floating-rate loan performance, and refinancing progress for loans maturing before 2027.