After an initial wobble, the mortgage-bond market found its footing in the first full week of trade following the Federal Reserve’s exit.
Trading volumes have risen sharply, buyers have returned and risk premiums have tightened on these bonds that are guaranteed by government-backed housing giants Fannie Mae, Freddie Mac and Ginnie Mae.
“Agency mortgages have adjusted to the Fed’s absence now,” said Walt Schmidt, mortgage strategist at FTN Financial.
Risk premiums on mortgage bonds widened 0.13 percentage point in the first two sessions after the March 31 end to the Fed’s $1.25 trillion purchase program. That sharp move wider attracted buyers and, by Friday, premiums were at 1.29 points, 0.04 point tighter on the week.
Chad Stephens, portfolio manager with StableRiver Capital Management, said much of the initial widening was attributable to the holiday-shortened week and queasiness among investors to step into the uncertainty. The Fed had been the dominant buyer in the market for 15 months, acquiring nearly the entire new supply of securitized mortgages.
Trading volumes in the secondary market have surged since the Fed’s exit, another indication of rising investor interest. According to online trading platform Tradeweb, which accounts for a large chunk of the secondary market, volumes jumped to $450 billion this past week, a leap of 82% from the week starting March 22, the last full week of trading before the Fed’s program ended. This compares to an average volume of $290 billion in 2006, before the crisis.
Banks and hedge funds were the most active and represented 42% of trading volume, according to Tradeweb, up from 34% in January 2009, when the Fed’s purchase program started.
Mortgage-bond investors are flush with cash from the payout from the purchase of delinquent loans by Fannie Mae and Freddie Mac. Some of these buyers need to buy agency mortgages again to match their portfolio levels with benchmark indexes.
The market’s stability also reflects the slowdown in new issuance to between $1 billion and $2 billion daily since the Fed’s exit, from more than $4 billion the Fed used to buy at its program’s peak, Mr. Schmidt said.
Mr. Schmidt expects the market’s stability to persist, which should further attract investors back to the market. Stable risk premiums will also be good for mortgage rates, which hit 5.21% for 30-year home loans, their highest level in eight months.
Treasurys Up in Week
Prices of long-dated Treasury securities ended the week on a high note Friday as developments on debt-ridden Greece spurred some investors to seek protection in low-risk U.S. government debt even as U.S. stocks rallied.
Treasury note and bond prices gained for the week, a reversal for a market that was pounded during the previous two weeks. The benchmark 10-year note rose 2/32, or $0.625 per $1,000 face value, to 97 27/32. Its yield fell to 3.890% from 3.896% Thursday, as yields move inversely to prices. The 30-year bond rose 7/32 to yield 4.747%.
By PRABHA NATARAJAN
Pages: