EDITOR NOTE: Fannie Mae mortgage bonds are at an all-time high. No, it’s not that investors are piling in to receive a share of Fannie Mae’s (not-so) attractive coupons. It’s the Fed buying up nearly $700 billion worth to keep mortgage rates low. In fact, the coupon, which was at a positive 15 basis points last November is now down to negative 34 basis points as of the end of last week. Some say that similar to the Danish economy, this can actually stimulate home buying and boost economic growth. But given the pandemic-driven uncertainties in our economy, the increasing poverty rate, and the severe income and wealth gap among Americans, to whom is this monetary trickery really intended to benefit? Certainly, not the average American.
The Fannie Mae 30-year 2.5% mortgage bond TBA, or forward settling mortgage-backed securities, hit a fresh record high, according to data compiled by Bloomberg.
Lower supply, as production instead shifts down the coupon stack, and Federal Reserve buying have helped boost the coupon’s price, which touched 105-15+ Monday morning in New York. In terms of Treasury option-adjusted spread, the coupon offers negative 34 basis points as of Friday’s close, down from zero at year-end and positive 15 basis points at the end of November.
The price rally and spread tightening have occurred despite the coupon sporting a ramped prepayment speed of 53.4 CPR on its 2019 vintage loans, the highest among the 2% to 4% coupons of similar vintage. This means that should the current level hold, about 53% of the principal balance within those mortgage-backed securities will be prepaid annually. As prepayments are returned to investors at par, this can weigh on performance.
There is a helpful feature of the current landscape that’s supportive of prices, Nomura Holdings Inc. analysts said. “A significant portion of FN 2.5% outstanding is now held by the Fed, and this could continue to keep the FN 2.5% roll special,” they wrote in a research note.
Since the central bank resumed quantitative easing back in March, it’s purchased $338.2 billion of the FNCL 2.5%. That’s the most of any coupon in the mortgage-backed security universe over that time, according to data from the Federal Reserve Bank of New York.
The FNCL 2% comes in second, at $332.4 billion.
Originally posted on Yahoo! Finance