Why Did Ginnie Mae TBAs Fall with the Bond Market?
Ginnie Mae and the TBA market
The Fannie Mae TBA (to-be-announced) market represents the usual conforming loan—the plain Fannie Mae or Freddie Mac 30-year mortgage. When a mortgage banker makes a Veterans Affairs or Federal Housing Authority loan, that loan is securitized and put into a Ginnie Mae TBA.
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The biggest difference between Fannie Mae MBS and Ginnie Mae MBS is that Ginnie Mae MBS have an explicit guarantee from the federal government. Fannie Mae MBS don’t have a guarantee like that. As a result, Ginnie Mae MBS trade at a premium to Fannie Mae TBAs.
Ginnie Mae TBAs fall by 16 ticks
The ten-year bond yield, tradable through the iShares 20+ Year Treasury Bond ETF (TLT), rose by 7 basis points to 158 basis points for the week ending August 19, 2016. Ginnie Mae TBAs fell by 16 ticks and closed at 104 12/32—underperforming Fannie Mae TBAs.
Mortgage REITs are big users of TBAs because they can increase or decrease exposure quickly. While older MBS issues can become illiquid, there’s always a large liquid market in TBAs.
Implications for mortgage REITs
Mortgage REITs such as Annaly Capital Management (NLY), MFA Financial (MFA), and American Capital Agency (AGNC) are big holders of Ginnie Mae TBAs. In the fourth quarter, American Capital Agency moved down aggressively in the coupon of its TBA portfolio. This move accounts for some of the higher-coupon TBAs’ poor performances. The rate of prepayments is driving these trades. Non-agency REITs such as Two Harbors Investment (TWO) also aren’t big TBA holders.
Investors interested in trading in the mortgage REIT sector through an ETF can look at the iShares Mortgage Real Estate Capped ETF (REM).