Bond prices are falling for bonds backed by agency mortgage loans from government-owned lenders Fannie Mae and Freddie Mac.
That’s mainly because the Fed has already started raising rates, which hits the value of all existing fixed-rate bonds, but also because it may start selling some of its holdings. $2.7 trillion, potentially reducing their value even further.
Analysts fear that the Fed’s current bond sale could flood the market, drive down prices and push yields higher as bond investors demand more compensation to lend money. That should boost mortgage rates as bond yields act as a benchmark for real estate lenders. Exchange rate increase over time tends to cool down the housing market, the market after two years of price increase has been considered by many to be too hot.
Most analysts don’t expect the Fed to start selling until next year, but Ankur Mehta, head of mortgage-backed bond research at Citigroup Inc., predicts sales will begin in the fourth quarter. . The Fed is also planning to reduce its Treasury holdings and will need to phase out dealer bonds to avoid being overused for mortgages, he said in a recent report.
Some investors who specialize in the normally quiet dealer market are raising new capital to buy bonds cheaply.
A bargain hunter is Annaly Capital Management Inc.
, a real estate investment trust that invests in mortgage-backed bonds. The company has agreed to sell its corporate lending platform to Ares Management Corp.
for $2.4 billion in April and issued about $750 million in new shares with a plan to go buy mortgage bonds.
“It’s all about the relative value proposition,” said David Finkelstein, chief executive officer of Annaly. Buying a dealer bond at current prices has the potential to yield annual returns of 12% to 15%, up from about 10% by the end of 2021, he said.
Eric Hagen, an analyst at brokerage BTIG who has a “neutral” recommendation on Annaly stock, said the additional yield on the fund, or spread, that investors are asking to buy debt dealer has increased by about 1.20 percentage points from 0.70 at the beginning of the year. .
“Fed portfolio sales are not something that should be ruled out,” Hagen said. “It makes sense that they could go that route because the prepayments from the existing portfolio would be very slow.”
The Fed ended its bond purchases in March and is reinvesting proceeds from maturing bonds into new securities. Starting in June, it will allow $17.5 billion in securities to mature monthly without reinvesting the proceeds, allowing those bonds to sell passively. It will allow up to $35 billion of securities to expire monthly from September. New York Federal Reserve President John Williams said at a conference in May the primary purpose of the sale. The potential is to reduce the percentage of mortgage bonds held by the Fed.
With mortgage rates rising rapidly, few borrowers are looking to refinance existing loans, squeezing many mortgage lenders and making $35 billion monthly unlikely. Former Boston Fed President Eric Rosengren said the central bank could eventually consider setting a floor for any buybacks; for example, a $20 billion monthly repurchase exchange will raise $5 billion in active revenue in a month of which only $15 billion is out of the portfolio through the flow. passive flow.
The Fed started buying agency bonds in 2009 to inject liquidity into depressed debt markets, then again in 2012 as part of a stimulus program. Its pandemic-era buying program has nearly doubled the central bank’s mortgage holdings in two years.
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Investors said the Fed would aim to lift just enough to prop up the economy without bringing it to a halt. It will be a delicate operation, and the Fed will likely take time to announce any plans to sell mortgage bonds well in advance of implementation, said Peter Federico, chief executive officer of AGNC Investment Corp..
, a REIT that specializes in agency bonds. That makes any change this year unlikely, he said.
Higher dealer bond yields hurt the company at first but are starting to help now. Shares of AGNC lost about a quarter of their value in the first four months of the year as bond and mortgage rates rose along with short-term interest rates. Shares have rallied about 11% in May despite a widespread sell-off in equities.
“The dealer market is unique because it plays a role in monetary policy and it often leads to a response to monetary policy,” Mr. Federico said.
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