The booming rally in the mortgage-bond market is out of control, says Scott Simon, head of mortgage-backed securities for Pimco.
Prices for issues guaranteed by Fannie Mae and Freddie Mac have risen to a record high.
“It’s gotten insane,” Simon told Bloomberg. “This is rarefied air.”
The price gains stem from investors’ belief that the recent decline in interest rates won’t spark a wave of home refinancing, because more than 23 percent of homeowners are underwater. Underwater homeowners owe more on their mortgages than their homes are worth.
The lack of refinancing limits the amount of mortgage bonds, boosting prices.
The average price of bonds guaranteed by Fannie Mae, Freddie Mac and Ginnie Mae hit a peak of 106.3 cents on the dollar recently, according to Bank of America Merrill Lynch’s Mortgage Master Index.
On March 31, when the Federal Reserve ended its program purchasing $1.25 trillion of the debt, the price was 104.2 cents.
Another factor limiting mortgage-bond supply is that potential homebuyers are finding it difficult to qualify for a loan, as are current homeowners looking to refinance, even those who aren’t underwater.
With Fannie Mae and Freddie Mac assumed to have 100 percent government backing, investors now view mortgage bonds as a safe haven, just like gold and Treasuries.
"Mortgages have become a flight-to-quality instrument," Mahesh Swaminathan, a strategist with Credit Suisse, told Dow Jones.
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