UPDATE: Agency Mortgage Bonds At Tightest Level Of The Year
(Updates with record low mortgage rates.)
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 government-backed bonds--a measure of their yield,
which moves inversely to their price--shrank 3 basis points, or 3/100ths of a
percentage point, to 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."
Investors' eagerness to invest in mortgage debt has helped drive loan rates to
all-time lows this week, Freddie Mac said. The average rate on 30-year fixed-
rate mortgages was 4.78%, the agency said Wednesday. That was down from 4.83%
from the previous week and 5.97% a year ago, and it matched the record low in
April.
Fannie Mae, Freddie Mac and Ginnie Mae bonds--called agency debt because the
issuers are government agencies--are particularly attractive because they are
essentially as risk-free as Treasurys but offer a slightly higher yield. At the
same time, the Federal Reserve is a steady, daily buyer of these bonds, making
them easy and cheap to sell.
Some large investors, notably Pacific Investment Management Co., the huge bond
fund firm in California, have been paring their holdings of mortgage bonds,
saying there are little gains to be made. But others say that mortgages offer
safety and yield, at least for now. In the new year, concerns about the Federal
Reserve's exit from the 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
11-25-091458ET
Copyright (c) 2009 Dow Jones & Company, Inc.
|