Bond prices backed by government mortgages from government-owned lenders are declining
This is primarily because the Fed has begun raising interest rates to reach the value of all existing fixed-rate bonds, but it has begun to sell some of the $ 2.7 trillion bonds, potentially further reducing their value. Because there is sex.
Analysts are concerned that federal sales of existing bonds could flood markets, push prices down and boost yields as bond investors demand more compensation to lend money. I am. Bond yields serve as a benchmark for real estate lenders, which will boost mortgage rates.Interest rates that rise over time tend to cool the housing market, after two years of price spikes It is widely said that it is overheated.
Most analysts don’t expect the Fed to start selling until next year, but Citigroup’s head of mortgage-backed securities research, Uncle Meta, predicts sales will start in the fourth quarter. increase. The Federal Reserve is also planning to reduce its holdings of government bonds, he said in a recent report that government bonds need to be shed to avoid overexposure to mortgages. ..
Some investors, who specialize in the normally mild agency market, are raising new money to buy cheap bonds.
One of the bargain hunters
, A real estate investment trust that invests in mortgage-backed securities.The company has a corporate lending platform
In April, it issued about $ 750 million in new shares for $ 2.4 billion with plans to go buy a mortgage.
“It’s all about relative value propositions,” said David Finkelstein, CEO of Analy. Buying agency bonds at current prices is likely to yield an annual return of about 10% to 12% to 15% at the end of 2021, he said.
Eric Hagen, an analyst at BTIG, a securities firm that recommends “neutral” for analy shares, said additional yields to the Treasury, where investors demand the purchase of agency debt, are about 1.20 percentage points from 0.70 at the beginning of the year. Said that it had swollen. ..
“Sales from the Fed’s portfolio should not be excluded,” Hagen said. “It’s logical that they might go that route, as prepayments from the current portfolio are painfully slow.”
The Fed closed its bond purchases in March and is reinvesting its maturity bond returns in new securities. Beginning in June, you will be able to matur $ 17.5 billion in securities each month without reinvesting your earnings. Allows those bonds to flow out passively.. This could result in the outflow of up to $ 35 billion in securities each month starting in September. Federal Reserve Bank of New York Governor John Williams said at a May meeting that the main purpose of potential sales was to reduce the Fed’s share of mortgages.
With mortgage rates rising rapidly, few borrowers are considering refinancing their existing loans. Narrow down many mortgage lenders A monthly outflow of $ 35 billion is unlikely. Former Federal Reserve Bank of Boston Governor Eric Rosengren said the central bank could eventually consider setting a lower limit for redemption. For example, a monthly redemption of $ 20 billion would require $ 5 billion in active sales a month after a passive runoff rolls off just $ 15 billion from the portfolio.
The Federal Reserve Board began buying agency bonds in 2009 to inject liquidity into the sluggish debt market, and then again in 2012 as part of its economic stimulus package.this is Purchase program in the pandemic era Central bank mortgage holdings have nearly doubled in two years.
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Investors say the Fed is aiming to unload enough to brake the economy without slowing it down.It’s a subtle operation, and the Fed is likely to take the time to communicate plans to sell mortgage bonds before doing so, said Peter Federico, CEO of.
, REITs specializing in agency bonds. It’s unlikely to make a difference this year, he said.
High yields on agency bonds initially hit the company, but are now beginning to help. AGNC stocks lost about a quarter of their value in the first four months of the year as financial and mortgage rates rose with short-term interest rates. Despite the significant sale of shares, May’s share price rose about 11%.
“The agency market is unique in that it plays a role in monetary policy and often leads to a reaction to monetary policy,” Federico said.
Write to Matt Wirz at [email protected]
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