Yields on Fannie Mae mortgage securities that guide U.S. home-loan rates climbed to the highest in three months after the Federal Reserve said yesterday it will trim its total monthly bond purchases by $10 billion. A gauge of company credit risk fell to the lowest since 2007.
A Bloomberg index of Fannie Mae’s current-coupon 30-year securities rose to 3.59 percent as of 5 p.m. in New York, the highest since Sept. 17. That’s up from 3.50 percent two days ago and as low as 2.28 percent in May, when speculation first mounted that the Fed was poised to pare monthly bond buying that’s included $40 billion of government-backed mortgage notes. The central bank’s purchases of housing debt and Treasuries will each fall by $5 billion next month.
The Fed will probably taper the purchases at the same pace at each policy setting meeting before ending in October, buying $220 billion in 2014, roughly as much as the $5.5 trillion market will grow, according to Credit Suisse Group AG analysts led by Mahesh Swaminathan. Even with total demand in excess of net issuance likely to be $140 billion, investors’ purchases may be limited at current yields, the New York-based analysts wrote today in a report.
The “supportive” supply-demand outlook “is contingent on bank and money manager buying, which may not materialize until spreads have widened sufficiently,” they said.
A measure of relative yields on the Fannie Mae current coupon securities, or those trading closest to face value, fell today to the lowest in a month. The bonds yield 131 basis points more than an average of five- and 10-year Treasury rates, down from as high as 151 basis points in July, according to data compiled by Bloomberg.
Investors should bet on the gap widening whenever it’s below 135 basis points, because the spread is likely to reach 155 basis points to 160 basis points once the Fed’s buying ends, Nomura Securities International analysts led by Ohmsatya Ravi wrote yesterday in a note to clients. The central bank started the current round of its mortgage-bond purchases in September 2012.
The Markit CDX North American Investment Grade Index, a credit-default swaps benchmark used to hedge against losses or to speculate on creditworthiness, declined 1.3 basis points to 66.1 basis points as of 5 p.m., the lowest since October 2007, according to prices compiled by Bloomberg. The credit-swaps benchmark has averaged 79.8 basis points this year.
The swaps measure falls as investor confidence improves and rises as it deteriorates. The contracts pay the buyer face value if a borrower fails to meet its obligations, less the value of the defaulted debt. A basis point equals $1,000 annually on a contract protecting $10 million of debt.
The risk premium on the Markit CDX North American High Yield Index, tied to the debt of 100 speculative-grade companies, decreased 3.5 basis points to 325.3, the lowest since at least 2007, Bloomberg prices show. High-yield, high-risk bonds are rated below Baa3 by Moody’s Investors Service and less than BBB- at Standard & Poor’s. A basis point is 0.01 percentage point.