MB Spreads Fall to Record Low as Fed Starts Buying

A measure of relative yields on mortgage securities dropped to the lowest on record after the Federal Reserve said it will expand its purchases, extending a rally that offered hedge funds returns of 15 percent in a week.

A Bloomberg index of yields on Fannie Mae-guaranteed mortgage bonds trading closest to face value fell about 1 basis points to 92 basis points, or 0.92 percentage point, higher than an average of five- and 10-year Treasury rates as of 3 p.m. in New York. That’s the narrowest spread since at least 1984 for the securities that guide U.S. home-loan rates.

“A typical fundamental-value framework really isn’t applicable here” because the Fed’s goals differ from those of normal investors, said Todd Abraham, co-head of the government and mortgage-backed fixed-income group at Federated Investors Inc. “It makes it pretty challenging to determine at what point you need to change your allocations. It’s almost more of a case of needing to try to anticipate what others are going to do.”

The Fed’s focus on the mortgage market, after speculation its third round of so-called quantitative easing would also include U.S. government bonds, capped a rise today in the housing debt’s absolute yields. A climb of 9 basis points from a record low to 2.21 percent reflected a jump in benchmark Treasury yields as the central bank’s move yesterday to strengthen the economy created soaring inflation expectations.

The spread, which tumbled 20 basis points yesterday as the central bank announced a plan to expand its holdings with monthly purchases of $40 billion of agency mortgage bonds, has declined from 152 at the start of the year.

Bloomberg

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