Investors should continue buying mortgage bonds tied to U.S. home loans because they are unlikely to suffer a wave of refinancings that would cut yields, according to JPMorgan Chase & Co.
Congressional action would be required to trigger any significant “government-sponsored refi wave” in the market for bonds owned or guaranteed by mortgage financiers Fannie Mae and Freddie Mac, JPMorgan analysts led by Matthew Jozoff wrote in an Aug. 27 note to clients.
“We continue to believe that such a large-scale event is highly unlikely,” Jozoff wrote. “Fannie and Freddie could not unilaterally cut mortgage rates on existing private mortgages around the country, nor could the Treasury.”
Government-backed mortgage bonds rallied compared with U.S. Treasuries last week by the most since July 23, according to Barclays Capital index data. Too many mortgage refinancings would hurt bondholders by reducing the average interest rate backing securities they purchased. While applications to refinance existing mortgages are at the highest in more than a year, Jozoff said he doesn’t expect another major increase.
Mortgage bond buyers are being “well compensated for the prepayment uncertainty,” Jozoff wrote.
Only congressional action could force large-scale loan modifications on Fannie Mae and Freddie Mac-backed bonds, he said.
“While we thought all along that the odds of the ‘nuclear’ refi option were low, we point out that the mechanics of implementing such a program are not quite as simple as a stroke of the pen,” he wrote.