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Why Fannie Mae TBAs barely moved as bonds went nowhere
Fannie Mae MBS rallied a bit on a strong bond market. The Fannie Mae 4% TBA started the week at 105 20/32 and picked up about an eighth to close at 105 24/32.
The Fannie Mae to-be-announced (or TBA) market represents the usual conforming loan—the plain Fannie Mae 30-year mortgage. Meanwhile, Ginnie Mae TBAs are where government loans go.
Last week didn’t have much market-moving economic data, with the exception of the FOMC minutes. Last Friday’s rally to 2.34% was given back on Monday. After that, bonds flatlined for the rest of the week.
There were two big takeaways from the FOMC minutes. The first concerned the labor market and the belief that there’s less slack in the labor market than originally thought.
We’ll get new home sales on Monday, the FHFA and Case-Shiller home price indices on Tuesday, pending home sales and the second revision to second quarter GDP on Thursday, and personal income and personal spending on Friday.
The discussions regarding what to do with the mortgage-backed securities’ (or MBS) assets on the Fed’s balance sheet is important to mortgage REITs. The Fed has said that they will retain their MBS holdings. They will maintain their exposure through reinvesting maturing proceeds.
The REIT sector uses a lot of leverage. The REITs have to payout 90% of their income as dividends. As a result, they aren’t able to build up big cash cushions. This limitation leaves REITs at the mercy of the credit markets.
Quantitative easing (or QE) has grown the size of the Fed’s balance sheet almost eight-fold since the turn of the century. From holding just over $500 billion in assets in 2000, it passed $4 trillion at the end of last year.
On the household front, the Fed noted that the mortgage market remains tight. However, signs of easing are starting to pop up as home price appreciation continues. Credit spreads in the mortgage market tightened, but applications are way down.
International tensions have caused bonds (or TLT) to be strong for the past few weeks. The day began with the ten-year bond yielding 2.4%. Bonds sold off on the minutes and then closed at 2.44%. The minutes showed that policy could tighten sooner at the margin.
Last week was our third sub-300,000 print on initial jobless claims this year. It was the lowest since May 2007. In fact, as a percentage of the population, initial jobless claims are at their lowest since the late 1960s.
Non-QM loans would typically be useful for borrowers with sporadic income, but a large amount of assets. However, lenders will only consider low loan-to-value (or LTV) loans—like 80% maximum, which really is a ceiling. Most lenders are below that.
We’ve seen that home price appreciation varies widely by location. In the active California markets, there’s tight supply because the foreclosure pipeline has been worked through. In several California markets, you’re seeing over 20% annual home price appreciation.
In general, mortgage delinquencies are falling as home prices rise and the foreclosure pipeline clears. While 5.7% seems low compared to the peak of 10%, the “normal” level prior to the housing bubble was in the range of 4%–5%.
Capacity utilization is a good top-down macroeconomic indicator that helps forecast the labor market, final demand, consumption, and inflation. While manufacturing is no longer the primary driver of the U.S. economy, it still influences the economy to a large degree—particularly for unskilled workers.
The biggest difference between a Fannie Mae mortgage-backed securities (or MBS) and a Ginnie Mae MBS is that Ginnie’s have an explicit guarantee from the federal government. Fannies don’t have a guarantee. However, there’s a “wink wink, nudge nudge” guarantee.
The TBA market allows loan originators to take individual loans and turn them into a homogeneous product that you can trade. TBAs settle once a month. Fannie Mae loans go into Fannie Mae securities. TBAs are broken out by coupon rate and settlement date.
Last week didn’t have a lot of stuff that could move the bond market, but bonds rallied anyway. Weakness in the Eurozone pushed yields lower and U.S. Treasuries followed along. Finally, tensions in Ukraine also caused a flight to quality which pushed yields lower.
The state of the consumer continues to be defensive. Retail sales came in well below expectations. Retail giant Walmart (WMT) reported that the low-end consumer is still struggling. Interestingly, the JOLTS Job Openings report had job openings at 4.7 million—the highest since 2001.
Mortgage real estate investment trusts (or REITs), like American Capital Agency (AGNC) and Annaly (NLY), will focus on data that will move the bond market. The most important data point will be the FOMC minutes.