What a difference seven years make.
U.S. mortgage securities, especially those with government backing, are being viewed as a haven for bond investors as they brace for the Federal Reserve to lift interest rates as soon as this week. The central bank has kept them near zero since 2008 amid the fallout from a global financial crisis sparked by mortgage debt.
Bond buyers’ comfort can be seen in how home-loan notes guaranteed by taxpayer-backed Fannie Mae and Freddie Mac or U.S.-owned Ginnie Mae are still trading at yields relative to Treasuries that are well below their long-term averages. They’ve also barely budged this year as spreads on corporate debentures have jumped.
BPV Capital Management’s Tom Fant says the $5.5 trillion market for so-called agency mortgage backed-securities offers the ability to avoid the three things that people are worried about most if the Fed does act. Those are: increased credit risk, rising bond yields and a debt market in which it gets hard to trade.
"People don’t know what the Fed is going to do, and what the global economy is going to do going forward as a result," Fant, a senior portfolio manager, said by telephone from Orlando, Florida. “To me, everything is screaming uncertainty and that’s why it’s important to be in conservative strategies and conservative sectors like agency MBS.”
He particularly recommends securities that are less sensitive to rising yields. Even if their yields go up a bit after a Fed move, they’ll look attractive in a still low-rate world, Fant said.
One risk to the MBS market is that investors such as banks and mutual funds have already piled in, potentially limiting future buying. A survey this month by JPMorgan Chase & Co. showed that “overweight” allocations to the securities by money managers had surged to 39 percent, from a low of about 15 percent around the beginning of the year.
Another challenge: the first rate hike will put the central bank on a path toward eventually ending its mortgage-bond purchases. The Fed has been buying to maintain the size of its $1.7 trillion of holdings, which it built to stimulate the economy. Still, almost two-thirds of the survey respondents told JPMorgan they expect that the reinvestment program -- which totals about $23 billion monthly at current rates -- will continue without changes until at least the fourth quarter of next year.
Government-backed housing debt hasn’t been the only oasis. Home-loan bonds issued by Wall Street during the bubble before the financial crisis are also outperforming this year, as the real-estate market remains in recovery mode.
Returns across different categories of those securities ranged from 5.6 percent to a loss of 0.8 percent through August, with most posting gains of at least 1.7 percent, according to a Credit Suisse Group AG report.
That compares with an average advance of just 0.1 percent on high-yield U.S. corporate debentures in the same period, and a bloodbath in bonds issued by high-yield energy companies. Government-backed mortgage bonds rose 0.9 percent, while investment-grade company debt lost 0.6 percent. U.S. Treasuries also returned 0.9 percent, according to Bank of America Merrill Lynch index data.
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