Mortgage-Bond Yields That Guide Loan Rates Rise to 10-Month HighJody Shenn
Yields on Fannie Mae and Freddie Mac mortgage bonds that guide U.S. home-loan rates climbed to the highest in 10 months after a report showing U.S. employers added more jobs than forecast.
Fannie Mae’s current-coupon 30-year securities climbed 0.06 percentage point to 2.74 percent as of 5 p.m. in New York, the highest level since May 11, according to data compiled by Bloomberg. The yields have risen from a record-low 1.68 percent reached Sept. 26, after the Federal Reserve announced it would start buying $40 billion of home-loan debt a month to begin its third round of bond purchases known as quantitative easing.
U.S. employment rose 236,000 last month, Labor Department figures showed today, exceeding a median forecast of 165,000 from economists surveyed by Bloomberg. The increase signaled the world’s largest economy is gaining strength, adding to speculation that bond yields are too low and the U.S. central bank may end its debt purchases as soon as this year.
“We cannot see QE even continuing to midyear,” Chris Rupkey, chief financial economist at Bank of Tokyo-Mitsubishi UFJ Ltd. in New York, said today in an e-mail. “There are probably going to be some interesting discussions around the table” when the Fed’s policy-setting panel meets this month.
A measure of spreads on the Fannie Mae current coupon debt, or bonds trading closest to face value, increased today to the widest since Aug. 17, signaling the debt continues to suffer more than Treasuries as the economy shows signs of improvement.
A Bloomberg index of yields on the mortgage bonds widened about 0.02 percentage point to 1.28 percentage point higher than an average of five- and 10-year Treasury rates. The gap reached an all-time low of 0.55 percentage point on Sept. 25.
Mortgage securities typically underperform Treasuries as bond yields rise because of concern their forecasted lives will extend as higher borrowing costs reduce homeowner refinancing. Spreads have also climbed as investors pare holdings of the notes built up ahead of the Fed’s purchases, which left mutual funds with about $215 billion more of the debt in late February than they would have had by matching the composition of benchmark bond indexes, according to JPMorgan Chase & Co.
“We expect it will take months before money managers are back to a neutral allocation of MBS, based on the rate at which their selling has occurred recently,” the JPMorgan analysts led by Matt Jozoff wrote in a March 1 report.
While the U.S. unemployment rate dropped to 7.7 percent, the lowest since December 2008, the central bank is probably in no rush to test the economy’s strength by paring its stimulus, said William O’Donnell, head U.S. government-bond strategist at Royal Bank of Scotland Group’s RBS Securities unit in Stamford, Connecticut.
“The market will ultimately conclude that rather than signaling an earlier-than-expected exit, the Fed may be cheered by what they see here and keep on keeping on to try and keep these trends alive,” he said.
To continue reading this article you must be a Bloomberg Professional Service Subscriber.
If you believe that you may have received this message in error please let us know.