Fannie Mae Mortgage-Bond Yields Decline to Lowest in a Year

Fannie Mae Mortgage Bond Yields Decline
Fannie Mae headquarters stands in Washington. Photographer: Joshua Roberts/Bloomberg

Yields on Fannie Mae and Freddie Mac mortgage securities that guide U.S. home-loan rates fell to the lowest in more than a year and many of their notes reached record high prices as investors seeking safe debt wager prepayments will stay manageable.

Fannie Mae’s current-coupon 30-year fixed-rate mortgage bonds, or those trading closest to face value, dropped to about 3.87 percent, narrowing to less than 0.66 percentage point more than 10-year Treasuries, the least since April 16, before widening to about 0.7 percentage point as of 5 p.m. in New York, according to data compiled by Bloomberg.

Spreads on agency mortgage bonds, whose principal can be returned to investors faster than they expect if borrowers refinance or move and slower if financing costs rise, have been rallying toward the record lows set when the Federal Reserve was still buying the debt, as markets get roiled by Europe’s sovereign debt crisis and signs of a slowing U.S. economy.

“In a world where investors can take on various risks such as sovereign risk, credit risk, liquidity risk and prepayment risk, prepayment risk seems the least distasteful at the moment,” JPMorgan Chase & Co. analysts led by Matthew Jozoff in New York wrote in a June 18 report.

Yields on Fannie Mae current-coupon bonds fell about 0.05 percentage point today to the lowest since April 2009, as their spreads widened about 0.02 percentage point and benchmark Treasury yields declined as an industry report showed sales of existing U.S. homes unexpectedly dropped in May. Yields on those agency mortgage securities have tumbled from 4.67 percent on April 5, Bloomberg data show.

Refinancing Risk

Fannie Mae’s 6 percent securities, backed by loans with higher rates, climbed to 108.3 cents on the dollar, an all-time high, and almost 2 percent higher than on March 31, when the Fed’s purchases ended, according to Bloomberg data. Also climbing to a record were 5 percent mortgage bonds guaranteed by the Washington-based company, which reached 105.8 cents.

Investors are betting that refinancing will remain low even as the lower yields drive down potential lending rates, after government-supported Fannie Mae and Freddie Mac boosted prepayments earlier this year by buying delinquent loans out of their securities to reduce their expenses.

”As the prices of MBS keep climbing, the market obviously becomes more leveraged on all the factors keeping prepayments low -- soft home prices, negative equity, persistent unemployment and tight underwriting,” Steve Abrahams, the New York-based head of mortgage-backed securities research at Deutsche Bank Inc., wrote in a June 18 report.

The average rate on a typical 30-year fixed-rate mortgage fell to 4.75 percent last week, near the record of 4.71 percent. This year’s high of 5.21 percent occurred in early April.

Applications to Refinance

Mortgage rates have been falling more slowly than yields on home-loan securities because of a shift in the lending business away from loan brokers and “toward channels that strengthen lenders’ pricing power over borrowers,” Abrahams wrote.

Applications for mortgage refinancing in the week ended June 11 climbed to the highest this year, though they remained 53 percent below last year’s high, according to the latest data from the Washington-based Mortgage Bankers Association.

Higher-than-projected prepayments typically return more of investors’ money when new investments carry lower yields, and may cause losses if they bought bonds above face value. Lower-than-expected refinancing and home sales cause investors to receive their money back slower than expected, as higher market yields make their investments less attractive.

The Fed’s $1.25 trillion of purchases of agency mortgage bonds guaranteed by Fannie Mae and Freddie Mac or federal agency Ginnie Mae helped narrow the spread on the Fannie Mae securities to a record low of 0.59 percentage point on March 29.

Current-coupon bonds in the $5.4 trillion market for agency mortgage securities are guiding rates on almost all new U.S. lending following the collapse of the non-agency market almost three years ago and a retreat by banks.

Before it's here, it's on the Bloomberg Terminal. LEARN MORE