Agency Mortgage Bonds At 15-Year High As A Safe-Haven Buy
June 23 2010 - 5:49PM
Dow Jones News
Mortgage securities issued by government agencies--Fannie Mae
(FNM), Freddie Mac (FRE) and Ginnie Mae--climbed to 15-year highs
Wednesday as investors sought investments that are as safe as
Treasurys but offer better returns.
These bonds, which are effectively guaranteed by the U.S.
government, now trade above their face value. Fannie Mae 30-year
bonds with a 4.5% coupon rose to $103.406 for each $100 of face
value. The 4% coupon bond rose as high as $101 before dropping back
to $100.781.
At those prices, these so-called agency bonds yield about 1.5%
more on an annual basis than comparable Treasury securities, and
many buyers consider them just as safe as Treasurys.
"Mortgages have become a flight-to-quality instrument," said
Mahesh Swaminathan, a strategist with Credit Suisse.
The perception that these bonds are guaranteed by the U.S.
government, which took control of the faltering agencies in the
depths of the credit crisis, has been a lure to many foreign
investors.
Central banks and other overseas buyers increased their holdings
of agency bonds by $10.5 billion in April, according to the latest
Treasury data. That compares with typical monthly increases of $2
billion to $4 billion earlier in the year.
Banks also have been big buyers of these bonds since they can
borrow cheaply in the short term and invest in these
higher-yielding long-term bonds with little fear that short-term
rates will rise any time soon.
This so-called carry trade got an extended lease on life after
the Federal Reserve's policymaking Federal Open Market Committee
said Wednesday that it planned to keep its benchmark short-term Fed
Funds rate below 0.25% for an extended period, said Ajay
Rajadhyaksha, head of fixed income research at Barclays
Capital.
Adding momentum to the price rise is a dearth of new bonds. Home
sales are still depressed, and refinancings have tapered off as
many homeowners eligible to reduce their mortgage payments have
already done so.
Historically, when mortgage bond prices climb this high--pushing
down yields, which move inversely to price--homeowners would rush
to refinance. That would serve to damp the market by removing the
high-yielding loans in bonds, a phenomenon called prepayment risk.
But rates have been so low for so long that fewer homeowners see a
need to refinance.
"Prepayment risk is at its lowest than in most times in the
past, and that's why prices keep rising," Rajadyaksha said.
There are skeptics in the market. Some portfolio managers said
they are anxious about buying mortgage bonds at these sky-high
prices.
"Supply-demand imbalance is keeping valuation on MBS very tight,
and unattractive to buyers like us," said Todd Abraham, portfolio
manager at Federated Investors of Pittsburgh, with $5 billion in
mortgage investments.
-By Prabha Natarajan, Dow Jones Newswires; 212-416-2468;
prabha.natarajan@dowjones.com