Fannie Mae and Freddie Mac mortgage bonds declined relative to Treasuries for a third day as the market for government-backed home-loan debt heads for its worst month since 2008 after reaching record-high prices.
Fannie Mae’s 30-year fixed-rate mortgage securities with 5.5 percent coupons declined 0.34 cent on the dollar to 106.5 cents as of 5 p.m. in New York, a drop of 0.32 cent relative to Treasuries, according to data compiled by Bloomberg. The bonds, whose underlying loans’ rates average about 6 percent, reached a record 107.92 cents on July 27 as the limited default risk of so-called agency mortgage bonds and signs that refinancing would remain contained stoked demand for the debt.
“People have done well and now there’s a lot more uncertainty in the market and so they’re taking some chips off the table,” David Cannon, global co-head of asset- and mortgage-backed securities at RBS Securities Inc. in Stamford, Connecticut, a unit of Royal Bank of Scotland Group Plc, said today in a telephone interview.
Investors are concerned that homeowner refinancing is increasing and speculating it could soar further if the government were to change rules for borrowers blocked from taking advantage of record-low new-loan rates by issues including their depressed home prices or credit profiles. Refinancing applications jumped 17 percent in the latest week to the highest since May 2009, the Mortgage Bankers Association said today.
‘High Dollar Prices’
“It makes mortgages less attractive in general when a government can change the policy to make something less attractive than what it was when you bought it,” Didi Weinblatt, who helps oversee more than $44 billion as vice president of mutual fund portfolios at San Antonio-based USAA Investment Management, said today in a telephone interview.
“Mortgages are at very high dollar prices,” she said. “Normally, mortgage prices don’t get that high.”
Mortgage bonds extended relative losses even after Bill Gross, manager of the world’s biggest bond fund at Pacific Investment Management Co., said yesterday after a government conference in Washington that, while he supports a loosening of refinancing rules to benefit consumers and boost the economy, it’s unlikely to occur.
Representative Barney Frank, the Massachusetts Democrat who leads the House Financial Services Committee, yesterday told CNBC that he also thought “that’s not going to happen.” Prepayments on mortgage bonds trading for more than face value punish investors by returning their cash more quickly at par.
Agency Debt Returns
The $5.2 trillion of agency mortgage bonds guaranteed by government-supported Fannie Mae and Freddie Mac or federal agency Ginnie Mae has returned 0.34 percentage point this month through yesterday less than Treasuries with maturities similar to the securities’ projected average lives, Barclays Capital index data show.
That’s the worst relative performance since the height of the financial crisis sparked by other housing debt in November 2008, when securities underperformed U.S. debt by 0.68 percentage point. Last month, the bonds returned 0.44 percentage point more than Treasuries.
Yields on Washington-based Fannie Mae’s 30-year, fixed-rate current-coupon securities, those that most affect loan rates because they’re trading closest to face value, fell to a low of 3.39 percent two days ago, from this year’s high of 4.67 percent on April 5, Bloomberg data show. Yields rose less than 0.01 percentage point to 3.46 percent today.
Spreads to Treasuries
The difference between yields on the debt and 10-year Treasuries widened today by less than 0.01 percentage point to 0.83 percentage point, the highest since June 4 and up from 62 basis points on Aug. 9, the data show. Lower-coupon mortgage bonds are being hurt by “heavier” sales by lenders over the past two days, RBS’s Cannon said.
The average rate on a typical 30-year U.S. mortgage remains near a record low, at 4.6 percent in the latest week, the Washington-based mortgage bankers group said today.
Bank of America Corp. mortgage-bond analysts led by Chris Flanagan said in a report last month that a larger refinancing wave sparked by government-created rules changes at Fannie Mae and McLean, Virginia-based Freddie Mac is unlikely because it would be “tantamount to partial default” on the securities and hence “exceptionally dangerous for financial markets.”
Still, declines in rates may be set to help more borrowers refinance by encouraging lenders to build up their operations and then compete for loans, and by helping mortgage companies offset upfront fees of as much as 2 percentage points of balances imposed by Fannie Mae and Freddie Mac for borrowers with worse credit, they wrote in a Aug. 13 report. The Federal Reserve’s Aug. 9 decision to restart its debt buying is likely to make lenders more comfortable in adding staff by suggesting that rates will stay low, they said.
Flanagan declined to comment further.
To contact the reporter on this story: Jody Shenn in New York at jshenn@bloomberg.net
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