Agency Mortgage Bonds At Tightest Level Of The Year
By Prabha Natarajan, Of DOW JONES NEWSWIRES
NEW YORK -(Dow Jones)- Mortgage-backed securities guaranteed by Fannie Mae (
FNM), Freddie Mac (FRE) and Ginnie Mae (GNM) rose to their highest level for the
year on Wednesday, buoyed by strong demand from investors seeking a safe haven
as the year draws to a close.
Risk premiums on these bonds--a measure of their yield, which moves inversely
to their price--were 3 basis points narrower at 124 basis points over the yields
of comparable Treasurys. The previous narrowest level this year was 129 basis
points in May.
"There's nothing else to buy," said Walt Schmidt, mortgage strategist at FTN
Financial. "At year-end, people don't want to start to take on risk, and they
are looking at staying close to the [benchmark Barclays Capital Aggregate Bond
Index], and MBS make up 40% of the index."
In addition, the Federal Reserve continues to be a steady, daily buyer of
these bonds.
While large holders of these bonds, notably Pacific Investment Management Co.,
have been paring their holdings of mortgage bonds, saying that risk premiums
have tightened too much with little gains to be made, others say that mortgages
offer safety at least for now. In the new year, however, concerns about the
Federal Reserve's exit from this market may overshadow any gains.
Investors expect the Fed to stop buying these bonds at the end of the first
quarter of 2010, ending the $1.25 trillion purchase program it started in
January. Since then, spreads have come down from 270 basis points over
Treasurys. The central bank still has $228 billion more to spend on mortgages.
"Mortgages have tightened so much that people who were underweight these bonds
feel they are better off adding some back to their portfolios," said Art Frank,
strategist at Deutsche Bank.
Not everyone is sanguine about the mortgage market. Some participants like
Barclays Capital are actually recommending that clients sell these bonds,
arguing that "mortgages have tightened to unsustainable levels."
"We believe there is more risk to the downside from owning these coupons,"
Barclays said in a note to clients.
-By Prabha Natarajan, Dow Jones Newswires; 212-416-2468; prabha.natarajan@
dowjones.com
(END) Dow Jones Newswires
11-25-091258ET
Copyright (c) 2009 Dow Jones & Company, Inc.
|