Mortgage Bonds Can’t Keep Up With Spreads at 11-Month HighJody Shenn
Borrowing costs for U.S. homebuyers may be falling again, thanks to Greece’s woes, but not as much as they could be.
That’s because, even as the potential unraveling of the European experiment drives investors toward safer debt, yield premiums on benchmark U.S. government-backed mortgage securities are climbing, reaching the highest level in 11 months.
An improvement in housing is adding to supply in the $5.5 trillion market as investors eye widening spreads on other bonds amid turmoil in Greece and the Federal Reserve’s coming retreat from the debt. The central bank has pledged to use reinvestments to maintain the size of its growth-boosting mortgage holdings until it raises short-term borrowing costs, a move that may come as soon as September.
“You’re getting closer to the point where the Fed is going to be lifting rates and, subsequent to that action, you’re going to be seeing them taper their reinvestments,” said Janaki Rao, a vice president at AllianceBernstein Holding LP, which oversees about $500 billion. “We’ve basically had the Fed in our market in one way or another since December 2008. As it exits, spreads should widen out.”
A Bloomberg index of yields on Fannie Mae-guaranteed mortgage bonds trading closest to face value rose to about 1.14 percentage point higher than an average of those on five- and 10-year Treasuries as of 3 p.m. in New York. That’s up from 0.92 percentage point on Dec. 31 and the highest since August.
As Greece’s clash with its creditors drives investors to toward safer debt, the widening spreads restrained a drop in absolute yields on the home-loan securities, which fell 0.03 percentage point today to 3.03 percent. That would be the lowest closing level since June 19.
The market for mortgage securities guaranteed by Fannie Mae, Freddie Mac or Ginnie Mae probably grew about $70 billion in the first half of this year, compared with $85 billion in all of 2014, according to a June 26 report by JPMorgan Chase & Co. analysts. They forecast net issuance of about $100 billion for all of 2015.
“A housing market that’s broadly improving is leading to more issuance in the agency mortgage sector than some would have thought,” said Mike Cudzil, co-head of the agency mortgage portfolio management team at Pacific Investment Management Co.
While spreads may stabilize in the short term, they’re poised to widen more eventually as the Fed’s retreat from the debt creates more rate volatility and the financial system deals with regulatory changes that have reduced liquidity and the use of leverage, he said.
Only 33 percent of investors surveyed by JPMorgan in April expected the Fed to begin winding down its holdings before the second half of next year.
“If we were in an environment where the Fed was done buying with their pay-downs tomorrow, we should be selling mortgages,” Cudzil said.
The potential impact of Greece’s woes is clouding the picture about the central bank’s plans, according to AllianceBernstein’s Rao.
“While the economy seems to be chugging along, and the Fed seems to be getting ready for September, the events in Greece could change that,” he said. “On the face of it, Greece is such a small problem and it appears to be contained. But, given my experience being around in 2008, I’m not as sanguine as some commentators are.”
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